Swiss Insolvency and Restructuring: Nachlassverfahren, Bankruptcy, and the Options for Distressed Companies

Financial distress is a reality that every business jurisdiction must address, and Switzerland addresses it with characteristic precision. The Swiss insolvency framework — centred on the Federal Debt Enforcement and Bankruptcy Act (Bundesgesetz über Schuldbetreibung und Konkurs, SchKG) and complemented by the corporate law provisions of the Code of Obligations (OR/CO) — provides a structured system of debt enforcement, bankruptcy proceedings, and restructuring mechanisms that balance creditor protection with the possibility of business rescue.

For companies operating in Zug’s volatile blockchain and technology ecosystem — where market downturns can rapidly erode token treasuries, funding rounds can fail, and regulatory developments can reshape business models overnight — understanding the insolvency framework is not morbid contingency planning. It is an essential part of the director’s toolkit, because the legal duties that arise when a company approaches financial distress are among the most personally consequential obligations in Swiss corporate law.

The Swiss Debt Enforcement and Bankruptcy Act (SchKG)

The SchKG, enacted in 1889 and revised numerous times since, governs the enforcement of monetary claims against debtors and the collective proceedings (bankruptcy, composition) that arise when a debtor cannot pay its debts.

Two Enforcement Systems

Swiss debt enforcement operates through two parallel systems:

Debt enforcement by seizure (Betreibung auf Pfändung, Art. 42-150 SchKG). This is the default enforcement method for individuals and companies not subject to bankruptcy. The enforcement office seizes specific assets of the debtor to satisfy the creditor’s claim. It is a creditor-by-creditor process, not a collective proceeding.

Debt enforcement by bankruptcy (Betreibung auf Konkurs, Art. 39, 159-270 SchKG). This is the enforcement method for entities registered in the commercial register — including AGs, GmbHs, foundations, and registered associations. When a creditor enforces a claim against a registered entity, the enforcement path leads to bankruptcy rather than seizure. This means that a single creditor’s enforcement action can trigger bankruptcy proceedings for the entire company.

This distinction is crucial: for a Zug-based AG or GmbH, an unpaid debt enforcement proceeding (Betreibung) that is not contested or paid leads directly to a bankruptcy petition, not merely to the seizure of individual assets.

Early Warning Signals: Capital Loss and Over-Indebtedness

Swiss corporate law imposes specific duties on the board of directors when the company’s financial position deteriorates. These duties create a structured escalation framework with increasingly urgent action requirements.

Capital Loss (Art. 725 CO)

Article 725 of the Code of Obligations (as revised effective 1 January 2023) addresses the situation where the company’s most recent annual financial statements show that half of the share capital and legal reserves are no longer covered by assets.

Board duty: The board must take measures to remedy the capital loss. These measures may include:

• Operational restructuring (cost reduction, revenue enhancement)
• Capital reduction and simultaneous re-increase (Kapitalschnitt mit Wiedererhöhung)
• Waiver of receivables by creditors or shareholders
• Subordination of shareholder loans
• Additional capital contributions by existing or new shareholders

The board must convene a general meeting and inform shareholders of the capital loss if it cannot be remedied by the board’s own measures.

Key 2023 reform change: The 2023 corporate law reform restructured the capital loss and over-indebtedness provisions (previously Art. 725 and Art. 725a CO; now Art. 725, 725a, and 725b CO) to provide clearer guidance and to introduce a more structured early warning framework. The reform also clarified the role of the auditor in the early warning process.

Imminent Insolvency (Art. 725a CO)

Article 725a CO (new provision in the 2023 reform) addresses the situation where there is a justified concern that the company will become insolvent (zahlungsunfähig) — i.e., unable to pay its debts as they fall due.

Board duty: The board must take measures to ensure the company’s solvency. These may include:

• Accelerating receivable collection
• Negotiating payment deferrals with creditors
• Securing bridge financing
• Disposing of non-core assets
• Initiating a composition moratorium (Nachlassverfahren)

The board must monitor the company’s cash flow on an ongoing basis and take measures with appropriate urgency.

Over-Indebtedness (Art. 725b CO)

Article 725b CO addresses over-indebtedness (Überschuldung) — the situation where the company’s liabilities exceed its assets. This is the most critical trigger for board action.

Board duty — the mandatory process:

1. Prepare an interim balance sheet. If there is a justified concern of over-indebtedness, the board must prepare an interim balance sheet at going concern values and a second interim balance sheet at liquidation values (Veräusserungswerte).

2. Auditor review. Both interim balance sheets must be reviewed by the auditor (licensed audit expert). If the company has opted out of the audit requirement, the board must still have the balance sheets reviewed by an auditor.

3. Assess the situation. If both balance sheets (going concern and liquidation values) show over-indebtedness, the board must notify the competent court — unless creditors subordinate their claims to an extent that eliminates the over-indebtedness.

4. Notify the court. The board must notify the court without delay (unverzüglich). Delay in notification is one of the most common bases for personal liability claims against directors in Swiss insolvency proceedings.

Subordination of claims (Rangrücktritt). Creditors — typically shareholders, related parties, or strategic creditors — may subordinate their claims to all other creditors (Art. 725b para. 4 CO). The subordination must be in writing, must cover both the claim and future interest, and must remain in effect for as long as the over-indebtedness persists. A valid subordination removes the obligation to notify the court, but does not eliminate the over-indebtedness or the board’s ongoing duty to monitor the financial situation.

Bankruptcy Proceedings

Voluntary Bankruptcy Declaration (Art. 191 SchKG)

The company’s board of directors may voluntarily declare bankruptcy by petitioning the competent court (Art. 191 SchKG read together with Art. 725b CO). This is the path when the board determines that restructuring is not feasible and notifies the court of over-indebtedness.

Creditor-Initiated Bankruptcy (Art. 159ff. SchKG)

A creditor who holds an unpaid, enforceable claim against a registered entity may petition for bankruptcy through the debt enforcement process:

1. Payment command (Zahlungsbefehl). The creditor files a debt enforcement request (Betreibungsbegehren) with the debt enforcement office (Betreibungsamt). The office issues a payment command to the debtor.

2. Objection (Rechtsvorschlag). The debtor may file an objection within 10 days of receiving the payment command. If the debtor objects, the creditor must obtain removal of the objection through court proceedings (provisional or definitive removal of objection, Art. 80-84 SchKG).

3. Continuation of enforcement (Fortsetzung der Betreibung). If no objection is filed or the objection is removed, the creditor requests continuation of the enforcement.

4. Bankruptcy petition (Konkursbegehren). For entities subject to the bankruptcy system, the continuation leads to a bankruptcy petition before the competent court. The court declares bankruptcy if the debtor is unable to pay or does not offer a composition.

5. Bankruptcy decree (Konkurseröffnung). The court issues a bankruptcy decree. From this moment, the debtor’s management authority ceases, and the administration of the bankrupt estate passes to the bankruptcy administration.

Ordinary vs. Summary Bankruptcy

Swiss bankruptcy proceedings take two forms:

Ordinary bankruptcy (ordentlicher Konkurs, Art. 231ff. SchKG). Applied when the bankrupt estate has sufficient assets to justify the cost of a full bankruptcy administration. The key features:

• A bankruptcy administration (Konkursverwaltung) is appointed by the creditors’ assembly or, in default, by the bankruptcy office.
• The administration inventories all assets, admits and adjudicates creditor claims, liquidates assets, and distributes the proceeds to creditors according to the statutory priority order.
• Creditors file their claims with the administration. Disputed claims are resolved through collocation proceedings (Kollokationsverfahren).
• The ordinary bankruptcy process typically takes 12-36 months, though complex cases can take significantly longer.

Summary bankruptcy (summarischer Konkurs, Art. 231 para. 1 SchKG). Applied when the bankrupt estate’s assets are insufficient to justify the cost of an ordinary bankruptcy (which is the case for many startup bankruptcies). The key features:

• The bankruptcy office (Konkursamt) conducts the proceedings directly, without a creditors’ assembly or separate bankruptcy administration.
• The proceedings are simplified and expedited.
• Creditor participation is limited — the bankruptcy office has broad discretion in the administration and liquidation of assets.
• Summary bankruptcy is significantly faster and cheaper than ordinary bankruptcy.

Priority of Claims (Art. 219 SchKG)

The SchKG establishes a strict priority order for the distribution of bankruptcy proceeds:

First class (privileged creditors):

• Employee claims for salary and related compensation (up to six months)
• AHV/IV/EO/ALV social security contributions and BVG pension fund contributions
• Claims of the family compensation fund (FAK)
• Claims for maintenance obligations (Unterhaltspflichten)

Second class:

• Claims of persons whose assets were entrusted to the debtor as a guardian
• BVG pension fund claims beyond first-class amounts

Third class (ordinary creditors):

• All other unsecured claims

Within each class, creditors are treated equally (pari passu) if the estate is insufficient to satisfy all claims in that class.

Secured creditors (Grundpfandgläubiger, Faustpfandgläubiger) are satisfied from the proceeds of their specific collateral, outside the general priority order. Any shortfall is treated as an unsecured claim in the appropriate class.

Composition Moratorium (Nachlassverfahren)

The composition moratorium (Nachlassverfahren, Art. 293-336 SchKG) is Switzerland’s primary business rescue mechanism — the functional equivalent of Chapter 11 in US law or administration in UK law, though structurally distinct from both.

Provisional Moratorium (Art. 293a SchKG)

The debtor (or, in certain cases, a creditor) may petition the competent court for a provisional composition moratorium. The court grants the provisional moratorium if there is a prospect that the debtor’s business can be restructured or that a composition agreement can be reached with creditors.

Key features of the provisional moratorium:

• Duration: Up to four months, extendable to a maximum of eight months.
• Commissioner (Sachwalter). The court appoints a commissioner to monitor the debtor’s business during the moratorium. The commissioner’s role ranges from monitoring to co-management, depending on the court’s order.
• Stay of proceedings. Debt enforcement proceedings are stayed during the moratorium. Creditors cannot initiate or continue enforcement actions.
• Continuation of business. The debtor’s management generally continues to operate the business during the moratorium, subject to the commissioner’s supervision and any restrictions imposed by the court.
• Confidentiality. The provisional moratorium is not published. This is a significant advantage over bankruptcy, which is publicly announced and typically causes irreversible reputational and commercial damage.

Definitive Moratorium (Art. 294ff. SchKG)

If the provisional moratorium demonstrates that restructuring is feasible, the court may grant a definitive moratorium:

• Duration: Up to 12 months, extendable to a maximum of 24 months.
• Publication. Unlike the provisional moratorium, the definitive moratorium is published.
• Enhanced commissioner powers. The commissioner’s powers may be expanded, including the authority to approve or reject significant transactions.
• Creditor participation. Creditors are informed and may participate in the composition process.

Types of Composition

The Nachlassverfahren can result in two types of composition:

Ordinary composition (ordentlicher Nachlassvertrag, Art. 314ff. SchKG). The debtor proposes a composition plan that offers creditors a dividend (a percentage of their claims) in exchange for discharge of the remaining claims. The composition plan requires approval by:

• A majority of creditors (by number) representing at least two-thirds of the admitted claims (by value), OR
• One-quarter of creditors (by number) representing at least three-quarters of claims (by value).

Once approved by the creditors and confirmed by the court, the composition is binding on all creditors (including dissenting creditors) — the Swiss equivalent of a cramdown.

Composition with assignment of assets (Nachlassvertrag mit Vermögensabtretung, Art. 317ff. SchKG). The debtor assigns all or part of its assets to creditors for liquidation. The creditors (or a liquidator appointed by them) liquidate the assets and distribute the proceeds. This is effectively a controlled liquidation outside of formal bankruptcy, often achieving better realisations than a bankruptcy forced sale.

Composition for Blockchain Companies

The Nachlassverfahren has particular relevance for blockchain companies because:

Token treasuries. Companies holding significant token treasuries face unique liquidation challenges in bankruptcy — forced sales of large token positions can depress market prices, destroying value for all stakeholders. The composition moratorium provides the time and flexibility to develop orderly disposal strategies.

Ongoing protocol obligations. Blockchain companies often have ongoing technical responsibilities — protocol maintenance, security updates, validator operations — that cannot simply cease in insolvency. The moratorium preserves the ability to maintain these functions while restructuring is pursued.

IP preservation. Technology companies’ primary assets are intellectual property, team expertise, and customer relationships — all of which depreciate rapidly in a bankruptcy proceeding. The moratorium preserves the going concern value that enables a more productive restructuring outcome.

Director Liability in Financial Distress

The personal liability exposure of directors reaches its peak during financial distress. The key liability risks are:

Late Notification of Over-Indebtedness

Failure to notify the court of over-indebtedness (Art. 725b CO) in a timely manner is the most common basis for director liability claims. If the company continues to operate after the point when notification should have been made, and creditors suffer additional losses as a result, the responsible directors are personally liable for those additional losses.

The liability arises under Article 754 CO (as discussed in the board composition article): directors are jointly and severally liable for damages caused by their negligent or intentional breach of duty. The late notification cases typically follow this pattern:

1. The company becomes over-indebted at time T.
2. The directors fail to prepare interim balance sheets or fail to notify the court.
3. The company continues operating, incurring additional liabilities (employee salaries, supplier invoices, social security contributions) between time T and the eventual bankruptcy.
4. In the bankruptcy, creditors (through the bankruptcy administration or by assignment of claims) pursue the directors for the additional losses incurred during the delay period.

The courts have been strict in applying this liability. Directors cannot excuse delay by pointing to ongoing negotiations with investors, expected revenue improvements, or subjective belief that the situation would improve. The duty to notify is triggered by objective financial data — when the balance sheets show over-indebtedness, the notification duty arises.

Social Security Contribution Liability (Art. 52 AHVG)

As discussed in the social security contributions article, Article 52 AHVG imposes personal liability on responsible officers (typically directors and managing directors) for unpaid AHV/IV/EO/ALV contributions. This liability:

• Is personal and joint and several
• Survives the company’s bankruptcy
• Cannot be discharged in the officer’s personal bankruptcy
• Is actively enforced by the Ausgleichskassen, which routinely file claims in bankruptcy proceedings

In practice, the Art. 52 AHVG liability is the most financially significant personal liability risk for directors of failed Swiss companies. Social security contributions accumulate rapidly, and the personal liability extends to contributions that were deducted from employee salaries but not remitted to the Ausgleichskasse — meaning the director is liable for both the employer and employee shares.

Wrongful Trading / Deepening Insolvency

Swiss law does not have a formal “wrongful trading” concept identical to the UK’s Insolvency Act provision. However, the combination of the Art. 725b CO notification duty and Art. 754 CO liability effectively creates an equivalent: directors who continue trading after the point when they knew (or should have known) that the company was over-indebted, without either resolving the over-indebtedness or notifying the court, are personally liable for the resulting losses to creditors.

Preferential Payments

Directors who make payments to selected creditors (including themselves, related parties, or specifically favoured creditors) during the period of insolvency may face personal liability and criminal sanctions. Under Article 167 of the Swiss Criminal Code (StGB), preferential treatment of creditors (Gläubigerbevorzugung) during insolvency is a criminal offence punishable by imprisonment of up to five years or a fine.

Restructuring Outside Formal Proceedings

Not every financial crisis requires formal insolvency proceedings. Swiss law and practice provide several informal and semi-formal restructuring tools:

Private Workouts

The company and its creditors negotiate a restructuring plan outside of court proceedings. This may involve:

• Rescheduling of debt payments
• Partial debt forgiveness
• Conversion of debt to equity (debt-equity swap)
• Injection of new capital
• Operational restructuring (cost reduction, business line disposal)

Private workouts require the voluntary agreement of all participating creditors. They are faster, cheaper, and more confidential than formal proceedings, but they cannot bind dissenting creditors (the “holdout problem”).

Standstill Agreements

Creditors agree to refrain from enforcing their claims for a specified period while the company and its advisers develop a restructuring plan. Standstill agreements are a standard tool in Swiss restructuring practice, buying time without the cost and publicity of formal proceedings.

Capital Measures

The board may propose capital measures to the general meeting:

• Capital reduction and re-increase (Kapitalschnitt). The company reduces its share capital to absorb losses (writing down the nominal value of shares), then simultaneously increases capital by issuing new shares to existing or new investors. This is the standard equity restructuring mechanism for Swiss AGs.

• Conditional capital increase. Pre-authorised capital for conversion of convertible loans or other conditional instruments.

• Shareholder loans and subordination. Shareholders provide loans to the company and subordinate those loans to third-party creditors, providing the company with additional liquidity without increasing the over-indebtedness.

Restructuring Advisers

The Swiss restructuring advisory market includes specialised firms, legal practices, and audit firms that provide turnaround management, interim management, and restructuring advisory services. For Zug-based companies, the key firms include the local offices of the major audit and advisory firms (EY, PwC, Deloitte, KPMG), specialised restructuring boutiques, and law firms with insolvency practices.

Practical Guidance for Directors of Distressed Companies

Immediate Actions When Distress Is Identified

1. Assess the financial position. Prepare current financial statements, cash flow projections, and a realistic assessment of the company’s ability to meet its obligations as they fall due.

2. Legal advice. Engage a Swiss lawyer specialising in insolvency and restructuring immediately. The legal duties are time-sensitive and the personal liability exposure demands professional guidance.

3. Monitor the over-indebtedness trigger. Prepare the interim balance sheets (going concern and liquidation values) required by Art. 725b CO. Have them reviewed by an auditor.

4. Document everything. Board minutes should thoroughly document the board’s assessment of the financial situation, the information on which decisions were based, and the rationale for the chosen course of action. This documentation is the primary defence against future liability claims.

5. Consider composition moratorium. If restructuring is feasible, a provisional composition moratorium (Art. 293a SchKG) provides breathing space while preserving the business. The confidential nature of the provisional moratorium is a significant advantage.

6. Do not prefer creditors. Treat all creditors equally. Do not pay related parties, shareholders, or favoured creditors ahead of others. Do not transfer assets to related entities.

7. Prioritise social security. Ensure AHV/IV/EO/ALV and BVG contributions are current. The personal liability under Art. 52 AHVG is strict and aggressively enforced.

The Timing Decision

The most consequential decision in any Swiss corporate distress situation is timing: when to notify the court, when to file for composition moratorium, or when to accept that restructuring has failed and voluntary bankruptcy is the appropriate course.

Acting too late exposes directors to personal liability for losses incurred during the delay. Acting too early may foreclose restructuring options that could have preserved the business and value for all stakeholders.

There is no formula for this decision. It requires experienced legal counsel, honest financial assessment, and the courage to accept uncomfortable realities. The directors who navigate this decision well — with thorough documentation, professional advice, and timely action — may preserve value, protect their personal positions, and emerge from the crisis with their professional reputations intact.

The directors who defer, deny, and delay will find that Swiss insolvency law — and the personal liability framework that accompanies it — is designed to hold them accountable for the consequences of inaction.

The Insolvency Framework in Context

Swiss insolvency law is not designed to protect companies from failure. It is designed to protect creditors from the consequences of company failure and to provide an orderly framework for resolving financial distress. The composition moratorium provides a genuine rescue mechanism for viable businesses. Bankruptcy provides an efficient liquidation mechanism for businesses that cannot be saved. And the personal liability framework ensures that the directors who steward companies through these processes take their duties seriously.

For Zug-based blockchain and technology companies — operating in a sector where market cycles can be brutal, regulatory shifts can be existential, and token treasuries can evaporate — understanding the insolvency framework is not optional. It is part of the operating infrastructure of doing business in Switzerland, and directors who understand it are better positioned to avoid it.