Duties of a Swiss subsidiary’s directors on the verge of a Covid-19 induced insolvency

extended for one year as from the Conclusions

original due date. The outstanding
Argentine law sets forth multiple debt-restructuring
unpaid instalments arising from such
mechanisms.
plans shall be payable as from the end of
The choice of any of them will depend on the
the emergency situation (1 April 2021).
particular circumstances of each case and will be
(vi) New attachments on bank accounts
transcendental not only for the subsistence of
of the persons mentioned in item 1
companies but also for their employees, suppliers,
are forbidden, except for labour or
creditors and clients, since the magnitude of the
maintenance credits. This prohibition
Argentine crisis involves not only the individual
aims at protecting the assets of a
interest of each debtor and creditor but the interest
company in reorganisation regarding
of the national economy as a whole.
unpaid post-filing obligations.
Therefore, in the current serious circumstances
3. Finally, it is established a reduction of the court
it is desirable that the mechanisms currently in
tax fee to be paid in case of court confirmation
force, or any others that may be implemented in
of a reorganisation plan corresponding to such
the future, allow debtors and creditors to agree on
proceedings reached by the declaration of
the solution to the fulfilment of their commitments
emergency. Such fee shall be calculated taking
in order to recreate the confidence that is needed
as a basis the total amount of the approved
for investors to return to Argentina in benefit of
reorganisation plan, with its haircuts, without
the local business economy.
computing the secured creditors, unless they are
included in the plan.
The bill has been sent to the Senate for its consideration.

Duties of a Swiss subsidiary’s directors

on the verge of a Covid-19 induced
insolvency
Benedict F Christ
Partner,VISCHER, Zurich, Switzerland
bfchrist@vischer.com

The global lockdowns in the wake of the coronavirus pandemic have caused turnovers to crash and
plunged the world economy into an unprecedented crisis. If a Swiss company’s board of directors fails
to respond adequately to this crisis, its members risk becoming liable. The situation for the members
of the board of a Swiss subsidiary is even trickier as they walk a tightrope if the interests of the Swiss
subsidiary do not coincide with those of the group. This article discusses the ten most important
questions regarding the conflicts between the interests of a Swiss subsidiary and the group under the
threat of insolvency following the Covid-19 pandemic.

The board of directors performs its duties in a

Board of directors’ duties of care and loyalty
Under Swiss law, the board of directors can delegate
the management of the company. However, certain
non-transferable and inalienable duties always remain
with the board of directors, in particular, the strategic
and financial overall management of the company.
standard leadership cycle by planning the strategy
and giving management the necessary directives,
by monitoring and controlling the management
and, if necessar y, inter vening and adjusting
the organisation and strategy. Under nor mal
circumstances, meetings held at regular inter vals

54 Insolvency and Restructuring International   Vol 14 No 2 September 2020

 (for instance, four times per year) are sufficient to
properly perform these duties.
For a vast majority of companies, the corona crisis
is trashing all planning. In industries subject to the
mandatory shut down (such as in the retail sector, the
travel industry or the catering industry) business has
collapsed. Even in industries without shut down, loss of
customer orders or interruption of supply chains slow
business massively. It is unclear what lasting impact the
crisis will have on businesses.
In view of these challenges, the board of directors
must radically adapt its leadership cycle. They must get
information more frequently and board meetings must
be held on an impromptu basis and be followed up by
meetings at shorter intervals. All members of the board
of directors must be available at short notice. The board’s
chairperson should initiate this acceleration of the
leadership cycle. However, if the chairperson fails to act,
each member of the board of directors is well advised to
be proactive and request the chairperson to provide all
available information and to promptly convene a meeting.
Issues on which a Swiss company’s board
of directors should focus during the
corona crisis
In the corona crisis, the company’s liquidity should
be the board’s primary focus as most companies are
suffering a slump in turnover while costs remain. In
view of the massive cash drain, many companies will be
on the verge of insolvency within a short time unless
countermeasures are taken. Thus, the board of directors
must regularly review the management’s liquidity
planning and evaluate and decide if the measures taken
to control the cash drain are appropriate.
The most effective measures are often reduced
working hours and emergency loans. Others include
contract adjustments, lease reductions, tax reliefs
or mass dismissals. The board of directors should
carefully examine all possible measures and ensure
that those selected are promptly implemented. If the
management seems overstrained or is not up to the
task, the board must take action itself, for instance,
by having the chairperson or another board member
assume an active role in the management.
Considerations regarding over-
indebtedness and restructuring measures
In the event of an imminent over-indebtedness, the
board of directors must act immediately, lest the
directors become personally liable. A company is
over-indebted if the company’s assets, neither as
Insolvency and Restructuring International   Vol 14 No 2 September 2020      55
a going concern nor at liquidation values, cover
the company’s liabilities. If there is a threat of
over-indebtedness, the board must have an audited
interim balance sheet prepared. If this shows
that the company is, in fact, over-indebted, the
board of directors must file for bankruptcy or take
restructuring measures.
So far, the corona crisis has mainly resulted in liquidity
problems for Swiss companies, though, it is likely that
balance sheet problems and over-indebtedness will
follow, triggering the board of directors’ obligation to
take restructuring measures.
In such cases, the board of directors must act nimbly
and vigorously. Various options must be examined in
short time, negotiations must be conducted with a
multitude of parties and the solution selected has to
be implemented quickly. This will be a tremendously
challenging and stressful time for the board of
directors. In order to mitigate this, depending on the
financial situation of the company, it is advisable to
evaluate possible scenarios and restructuring measures
as part of a contingency plan well in advance.
Possible consequences of a breach of
directors’ duties under Swiss law
The members of the board of directors could become
liable for damages in the event of a breach of their
duties. The board members and all persons involved
in the company’s management are liable for any loss
or damage arising from any intentional or negligent
breach of their duties. Breaches of certain directors’
duties could even result in criminal prosecution.
In particular, the board of directors may be held
liable if it fails to make decisions, shows a lack of
commitment or in case of conflicts of interest. Even
if a decision of the board subsequently proves to be
wrong, if such decision has been taken as part of a
proper decision-making process, based on adequate
information and such decision seemed reasonable at
the time, a Swiss court will not hold the board liable
for breach of directors’ duties.
Group dilemma and interests that a
Swiss subsidiary’s board must safeguard
Many companies in Switzerland are part of a group.
As subsidiaries, they belong to a larger whole and
sometimes heavily depend on other (often foreign)
group companies; often they could hardly function
without support from the group.
Unlike other jurisdictions, Switzerland does not
have specific rules governing groups of companies.
 Duties of a Swiss subsidiary’s directors on the verge of a Covid-19 induced insolvency
Under Swiss law, each company is considered an
independent, standalone entity. Thus, in principle, a
Swiss subsidiary’s board of directors must exclusively
act in the best interests of such Swiss subsidiar y,
without taking into account the interests of the group
or other group companies. This cannot be changed
by way of agreement. Therefore, board members of
a Swiss subsidiary are often in a latent dilemma. The
dilemma is particularly acute when a board member
simultaneously holds a leadership position in the Swiss
subsidiary and another group company, or if a Swiss
subsidiary is subject to strict guidelines and instructions
from the parent company.
In normal times (for instance, before the corona
crisis), the group dilemma is usually negligible for the
Swiss subsidiary’s board because the interests of the
subsidiary and the group are aligned and, the group
would typically support the subsidiary if financial
difficulties arose.
Dealing with the group dilemma in the
Covid-19 crisis
The board of a Swiss company must always act in the
best interests of the company. This applies equally to
all the Swiss subsidiaries of a group and is of particular
importance if the Swiss subsidiary or other group
companies are on the brink of illiquidity or over-
indebtedness. In this situation, the interests of the
individual group companies may diverge. In particular,
the grant of loans to the parent company or affiliates
as well as participating in a cash pool becomes tricky
for a Swiss subsidiar y (see below). Nevertheless,
according to a recent Swissair judgment of the Swiss
Federal Supreme Court, a Swiss subsidiary’s board of
directors may, under certain circumstances, also take
into account the interests of the group if this is also
beneficial to the Swiss subsidiary.
When weighing up the interests involved, the board
of directors is walking a tightrope. It is therefore
advisable for the board to seek professional advice.
Conditions under which a subsidiary can
grant loans to other group companies
There are generally no restrictions on loans from a
Swiss subsidiary to a parent company or the parent’s
affiliates (so-called up- or cross-stream loans) if they are
granted at arm’s length. Up- or cross-stream loans which
are not at arm’s length must be limited to the amount
of the subsidiary’s freely distributable equity reserves.
As a rule of thumb, an up- or cross-stream loan meets
the arm’s length test if a third party (eg, a bank) would
56 Insolvency and Restructuring International   Vol 14 No 2 September 2020
also grant the loan on the same terms. The main criteria
for the at arm’s length test are the borrower’s credit
rating and whether any securities are granted, but the
loan amount, the loan’s term and the termination
rights are also of importance.
In a landmark decision in the context of the Swissair
bankruptcy, the Federal Supreme Court indicated
in an obiter dictum that it is questionable whether
unsecured up- or cross-stream loans can ever actually be
at arm’s length. In another more recent Swissair-related
decision, however, the Supreme Court revisited this
point and stated that, depending on the circumstances,
unsecured loans could be at arm’s length if the
borrower has a good credit rating.
In the current Covid-19 situation, the borrower’s
credit must be reviewed regularly. If the borrower’s
credit deteriorates, up- or cross-stream loans should
only be granted if they are secured or if they are limited
to the amount of the subsidiary’s freely distributable
equity reserves. With regard to existing unsecured up-
or cross-stream loans, the subsidiary should consider
whether to exercise any rights under the respective loan
agreements, such as adjustments or early termination.
Participation by a Swiss subsidiary in a
cash pool
In a typical cash pool arrangement, all group companies
participate in an arrangement under which all cash will
be transferred from the group companies on a regular
(often daily) basis to a master account operated by
one group company, the cash pool leader. Similar to
a current account, each group company has a credit
(or debit) balance with the cash pool leader which
changes daily. Having a credit balance is basically the
same for a group company as granting a loan to the
cash pool leader, and therefore the same due diligence
requirements and considerations apply to cash pools
as to other loans. If the requirements for loans are met
(see above), participation in the cash pool is permitted.
Because the amount lent under a cash pool
arrangement fluctuates constantly, the solvency of the
cash pool leader must be monitored on an ongoing
basis, especially during a crisis such as currently with
Covid-19. If repayment appears at risk, the Swiss
subsidiary’s board must act and, as a rule, refrain from
granting further up- or cross-stream loans under the
cash pool arrangement. However, the appropriate
actions must be determined on a case-by-case basis. For
instance, the Swiss Federal Supreme Court in a Swissair
decision held that the Swissair board did not breach
its duties when remaining in the cash pool despite the
group’s rapidly deteriorating creditworthiness. This
 is because Swissair was highly dependent on services
from other group companies, termination of which
would have been even more detrimental to Swissair
than remaining in the cash pool.
Use of Covid-19 credits for payments to
group companies
Swiss companies facing liquidity shortages due to
the corona crisis can obtain a Covid-19 credit. These
Covid-19 credits are intended to infuse liquidity into
the operational business in Switzerland.
Once a company has obtained a Covid-19 credit,
any up- or cross-stream payments within the group
are sensitive. With a few exceptions, the granting
of intra-group loans is not permissible; intra-group
loans to foreign companies are completely excluded.
Accordingly, participating in a cash pool during the
term of a Covid-19 credit is hardly possible and any
other payments made by a Swiss subsidiary to other
group companies, especially foreign ones, must be
carefully examined.
Reliance on the parent company’s support
Under Swiss law, a parent company is nothing
more than a normal shareholder of its subsidiaries.
Therefore, apart from its obligation to make an
initial capital contribution, the parent company of a
Swiss subsidiary has no legal obligations towards that
subsidiary; in particular, the parent company has no
duty to make additional contributions to or finance
the Swiss subsidiary.
Insolvency and Restructuring International   Vol 14 No 2 September 2020      57
In practice, there is often an implicit ‘group
guarantee’ in favour of the affiliates. However, such an
implicit guarantee is not legally enforceable. For the
Swiss subsidiary’s board to rely on the group’s support,
it must obtain legally binding commitments (eg, a
financing commitment or a subordination agreement)
from the group and such commitments should come
from companies with sufficient credit. Only where
such legally binding commitments are in place can a
Swiss subsidiary’s board avoid filing for bankruptcy in
the event of over-indebtedness. Nevertheless, under
the Swiss Covid-19 insolvency regulation, the Swiss
subsidiary’s board does not need to notify the court if
the company was not over-indebted at the end of 2019
and there is a prospect that the over-indebtedness can
be remedied by the end of 2020.
Benedict F Christ is a partner with VISCHER, a leading Swiss full-
service business law firm. He is based in Zurich, Switzerland. Ben
is a versed lawyer advising domestic and international clients
across a broad spectrum of complex national and cross-border
transactions as well as corporate and general business matters
including distressed M&A and restructuring transactions.