Switzerland
capital followed immediately by an increase in capital (a capital cut or accordion recapital- isation) will be discussed in detail below.
Assets On the asset side, possible measures include an aggressive management of the company’s working capital (for example, decrease of inventory, strict payment terms, and strict management of accounts receivables), sale and lease back transactions and divesture of non-operative assets or non-strategic or non- vital parts of the business (such as divisions, subsidiaries, and real estate). While liquida- tion or partial liquidation is always an option of last resort for an ailing company, it is usu- ally the sale of all or parts of the business as a going concern that is likely to maximise the value for all stakeholders, in particular where discontinuing and liquidating the business or part of it is likely to lead to significant liqui- dation costs (such as severance payments, pension obligations, and rental agreements) or contingent liabilities (such as vacating of production sites, and damage claims under broken agreements).
Reduction and increase of capital Reducing the capital and allocating it to the reserves, followed by an increase in capital immediately after, can be a means of restruc- turing. Article 732 paragraph 5 CO states that the share capital may be reduced to below SFr100,000 ($110,000) as long as it is immediately replaced by fully paid in capital in the amount of at least SFr100,000. When the capital has been reduced to zero, it is con- sidered as a capital cut (accordion recapitali- sation). When the capital is increased following a
capital reduction, the rules with regards to amending the articles of association as well as
an auditor’s report according to the Code of Obligation of an ordinary capital reduction, in principle, do not apply. However, for the increase in capital, the normal legal grounds have to be taken into consideration and abid- ed by. Thus, the shareholders’ meeting initial- ly decides on a capital decrease followed by a capital increase. Immediately after, the board of directors executes the capital increase.
Capital cuts A capital cut according to article 732a CO exists when the capital of a company is reduced to zero and immediately increased again for the purpose of restructuring a com- pany. Thus, the capital is replaced by new capital. The membership rights of the current shareholders lapse at the time of the reduc- tion and the issued shares must be cancelled. The current shareholders, however, have a subscription right that may not be withdrawn from them. A capital cut to zero is only possible when
it serves restructuring purposes and may only be decided upon by the shareholders’ meeting when the company capital is objectively com- pletely lost. Thus, a need to restructure as in the case of overindebtedness according to article 725 CO must lie at hand. However, the necessity to restructure the company on its own is insufficient to underpin a capital cut to zero as a measure with a restructuring purpose according to article 732a CO. When a company is overindebted, the short-term purpose of a restructuring measure is to place the company in such a position as to avoid having to inform the judge (according to arti- cle 725 paragraph 2 CO) irrespective of whether claims are subordinated. This is the minimum target that should be achieved by the accordion recapitalisation. Should the increase in capital be insufficient to remove
the overindebtedness, a restructuring purpose (as required by article 732a CO) may nonetheless lie at hand when further restruc- turing measures are planned to remove the overindebtedness. Therefore, for the shareholders’ meeting to
decide on an accordion recapitalisation for the purpose of restructuring a company, the overindebtedness must either be removed or further restructuring measures must be decid- ed upon. These, together with the capital increase must provide reasonable prospects for a sustainable restructuring of the compa- ny. The board of directors must establish a restructuring plan which relieves it of the duty to inform a judge irrespective of whether claims are subordinated. Additionally, it must inform the shareholders’ meeting of further restructuring measures which are planned in order to achieve the restructuring purpose. Without this information, the shareholders cannot evaluate whether the reduction in cap- ital followed by an immediate increase in cap- ital contains a restructuring purpose. Furthermore, shareholders cannot evaluate whether they want to make use of their pre- emptive right and carry on participating in the company. The prerequisites for the application of
article 732a CO as discussed above have been laid down clearly in the decision issued by the Swiss Federal Supreme Court on February 13 2012.
Decision by the Swiss Federal Supreme Court (ATF 138 III 204) Initially, X Holding AG (the company) had a share capital in the amount of SFr500,000 divided into 500 shares with a nominal value of SFr1,000 each. Three shareholders each held 10% and the majority shareholder held 70% of the shares in the company. These four
About the author Debora Durrer-Kern was admitted to the bar in Switzerland in 2011 and holds an MLaw from the University of Fribourg. Her practice covers corporate law and M&A, notarial services, and capital markets. She recently worked on: the restructuring of existing financing
transactions for banks as well as borrowers; loan and securitisation contracts plus all related documents; and various national and cross- border acquisitions for Swiss and international clients. She speaks German, English and Afrikaans.
Contact information
Debora Durrer-Kern Meyerlustenberger Lachenal
Forchstrasse 452 Postfach 1432 8032 Zürich, Switzerland T +41 44 396 91 91 F +41 44 396 91 92 W:
www.mll-legal.com
www.iflr.com
IFLR|RESTRUCTURING & INSOLVENCY 045
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