New «leading case» on Swiss pre-pack restructurings
«Pre-packs» provide for a «silent» (confidential) and swift restructuring by way of a pre-negotiated sale of certain assets or an entire business during a moratorium, thereby minimizing the loss of value and negative publicity normally associated with a public insolvency proceeding.
The recent decision of the Federal Supreme Court confirms previous legal practice and provides helpful legal certainty regarding
- the general admissibility of privately pre-negotiated pre-packs,
- the approval of pre-packs by the competent court without a hearing of the creditors, and
- the (largely excluded) rights to appeal by creditors.
The Federal Supreme Court decision thereby underscores the possibilities to use a pre-pack in Swiss restructurings.
Swiss Federal Supreme Court provides helpful guidance in respect of pre-negotiated sales of a company’s business in the context of a restructuring («pre-pack»)
In UK and US law, so-called «pre-packs» have long been established as an effective restructuring measure. In its recently published decision 5A_827/2019 dated March 18, 2021 (announced for publication as a leading decision), the Federal Supreme Court has now for the first time confirmed the previous legal practice of privately pre-negotiated, confidential pre-pack restructurings in Switzerland and thus provided legal certainty under Swiss law.
Facts and Decision
The Federal Supreme Court decision concerned the sale of an IT company with around 70 employees. Initially, the applicant, a company in financial distress, founded a subsidiary company and prepared the transfer of its IT business by means of an asset transfer agreement. In a private bidding process, a purchase price of approximately CHF 1.3 million was determined for the newco. A few days after the establishment of newco, the insolvent company applied for the opening of the provisional moratorium (provisorische Nachlassstundung) with the following elements:
- appointment of an administrator
- waiving of the publication of the debt-restructuring moratorium (so-called «silent moratorium», stille Stundung).
On December 13, 2018, the competent court approved the request for provisional moratorium of the insolvent company without publishing the decision.
Shortly thereafter, the competent court approved the request of the administrator to transfer certain assets and liabilities to the newco and the subsequent sale of all shares of the newco to the previously selected bidder. The decision was disclosed only to the insolvent company as the applicant and the administrator. Less than four months after the court approval of the pre-pack, the competent court granted the definitive moratorium. This decision was published. A creditor filed an appeal against it, claiming, inter alia, that the bankruptcy of the insolvent applicant should have been opened already as of December 13, 2018 and that the approval of the pre-pack should be declared null and void.
The Federal Supreme Court dismissed the creditor’s appeal on all points to the extent that it was upheld.
Main Considerations of the Federal Supreme Court
- The creditor cannot challenge the granting of the provisional moratorium and request its revocation with retroactive effects.
- Approval of a pre-pack may be envisaged if negotiations with a buyer are at an advanced stage and a better result for the creditors can be expected with such an immediate sale compared to a bankruptcy.
- The creditor did not have to be heard for the approval of the pre-pack and had no rights to participate in the decision making process.
- The contract negotiations, the determination of the sale price, the execution of the contract and its approval by the court could be carried out confidentially and without the need to involve the creditor.
- Even if the creditor would have been informed about the approval of the pre-pack, the creditor would not have been entitled to challenge the decision.
- In the case at hand, there were no indications that the decision of the competent court was null and void.
Assessment and Outlook
In Switzerland, pre-packs are increasingly gaining importance as a restructuring solution which, compared to bankruptcy, often allows for a better preservation of value for the debtor, employees and business partners concerned. The decision of the Federal Supreme Court confirms previous court practice of regional competent courts, some of which approved a pre-pack within a few days. This previous practice underscores the following advantages of the Swiss pre-pack:
- The business transfer can be prepared confidentially.
- In contrast to certain foreign procedures, there is no need for a public bidding process.
- The restructuring can be completed quickly.
- Upon receipt of court approval, the bar for contesting a pre-pack is set high and therefore such transactions provide more security for buyers.
- The sale of a business unit by means of a pre-pack often generates higher proceeds than in bankruptcy liquidation.
In addition to the foregoing advantages, the Swiss pre-pack has following remarkable features:
- Buyer may choose to acquire only selected assets, liabilities and contracts (albeit subject to administrator and court approval);
- buyer may take over certain, but not all, employees in connection with the transferred business, without being liable for pre-existing claims of the employees against the insolvent debtor (e.g., outstanding salary);
- no joint liability of debtor and buyer for employee claims.
Thanks to the advantages and increasing practice of Swiss pre-packs, they are likely to gain in importance, also in an international context in the future.
This Homburger Bulletin expresses general views of the authors at the date of the Bulletin, without considering the facts and circumstances of any particular person or transaction. It does not constitute legal advice. This Bulletin may not be relied upon by any person for any purpose, and any liability for the accuracy, correctness or fairness of the contents of this Homburger Bulletin is explicitly excluded.