COVID-19 bridging loans - legal and economic consequences.

A study by the ZHAW School of Management shows that as of the end of March 2020, more than 50% of small and medium-sized enterprises in Switzerland expect to run into financial difficulties in the coming months. The situation is serious. Accordingly, on March 26, 2020, the Federal Council issued the COVID-19 Solidarity Guarantee Ordinance. This enables affected companies to access liquidity quickly and without complications. The corresponding COVID-19 bridging loans are popular, and several tens of thousands of applications have already been received. However, companies are well advised to carefully examine the legal and economic (long-term) consequences of these loans.

COVID-19 bridging loans can lead to over-indebtedness

COVID-19 credits can mean not only the rescue, but the bankruptcy of a company. Art. 725 CO stipulates that the board of directors must notify the judge without delay in the event of proven balance sheet overindebtedness. Failure to do so may result in liability for damages due to bankruptcy delay. While COVID-19 loans of less than 0.5 million Swiss francs are off-balance sheet until March 31, 2022, loans of more than 0.5 million Swiss francs must be fully recognized as debt. This may result in loans taken out - together with the value adjustments and provisions that may be necessary under COVID-19 - leading to over-indebtedness in the short to medium term.

Companies that have already financed their business activities through loans in the past risk bankruptcy by taking out the COVID-19 loan. This can lead not only to the demise of the company, but also to personal liability of the board of directors. Careful liquidity planning and balance sheet analysis are thus imperative to prevent bankruptcy in the long term despite the bridging loan. There are indications that the Federal Council has recognized this problem and will amend the ordinance accordingly.

COVID 19 bridging loans restrict entrepreneurial freedom of action

Although the granting of COVID-19 loans is quick and straightforward, it is subject to conditions. For example, the Ordinance stipulates that during the term of the credit, the distribution of dividends and bonuses, the granting of asset loans or the refinancing of personal or shareholder loans is excluded. Repayment of shareholder loans (including those accounted for as current accounts) is thus not permitted during the term of the loan. Likewise, the forwarding of the loan amount to a person abroad associated with the applying company is not permitted. Anyone who does not comply with this can be prosecuted.

Before taking out a loan: Check the situation and alternatives  

The COVID 19 credit, designed as a short-term liquidity injection, can have serious long-term consequences. Accordingly, companies are well advised to consider the following at their leisure:

• Status and strategy analysis: How is my company positioned? Do we need to adjust our corporate strategy to survive the crisis? What liquidity do we need in the coming months? Can we use alternative measures in our favor, such as a legal standstill under debt collection law, tax deferrals, deferral of social security contributions or tax optimization? Are there any long-term prospects for restructuring at all?
• Over-indebtedness situation: Based on the findings of the status and strategy analysis, can we repay the outstanding loans in the long term? Are there any liability risks for the Board of Directors, e.g. as a result of bankruptcy delay, non-payment of AHV contributions or other breaches of duty?
• Evaluation of probate: If the liquidity planning suggests a default in the next few months, it is imperative that the instrument of debt-restructuring moratorium is also examined. During a moratorium, debt collection proceedings can neither be initiated nor continued and the debtor can take reorganization measures under the protective cover of the moratorium. In addition, salary payments are secured for a limited period by the payment of insolvency compensation. For companies that were financially sound before the Corona crisis, forbearance is thus a possible restructuring instrument.

Authors:
Simon Roth and Alain Friedrich are partners and lawyers at Lex Futura AG. The firm specializes in providing legal advice to companies, management and board members in crisis situations, especially in reorganization law.