Legal Aspects of Coronavirus in Switzerland IV – The Walk into Uncertainty
The Coronavirus currently has our whole life in a stranglehold and affects our everyday life. This not only from a medical or economic point of view, but also from a legal point of view. As this situation is likely to continue for some time and the economic consequences are difficult to assess at present, companies and entrepreneurs should start thinking today about how their companies can cope with the crisis in the longer term. What is certain is that there will be life after COVID-19. Therefore, it is important to survive the time until then as unscathed as possible.
In the following, we would like to highlight some (legal) aspects and priorities such as cash and debt management, operations and internal business processes, employment and tenancy law aspects, but also contract management or restructuring issues, which should be considered by every company and entrepreneur in the current situation.
- Cash management and Cash Preservation
Companies usually go bankrupt not because of a lack of assets, but because of a lack of liquidity. In the current situation, therefore, great attention must be paid to cash management and the maintenance of sufficient cash reserves. Only with sufficient liquidity can a company meet its financial obligations and maintain its operations even in a crisis.
The Swiss Federal Council has reacted quickly and practically with its aid programme for small and medium size enterprises. For up to 10% of last year’s turnover, up to a maximum of CHF 500,000.00, a loan secured by the Swiss Confederation can be obtained from the company’s main bank without any major formalities. The high demand shows that many companies are concerned about their liquidity and have therefore requested such a bridging loan.
As easy as it is to obtain such a bridging loan, it is also very demanding to handle. These bridging loans are intended to help companies affected by measures to combat the spread of the corona virus to survive these measures. For this reason, the Swiss Confederation has imposed conditions so that the loans are only used to maintain liquidity. For example, no investments in fixed assets may be made during the term of the loan (only replacement investments are permitted). This can lead to restrictions, especially in the medium to long term, if no important acquisitions or business expansions can be made, which might possibly ensure the survival of a company.
- Aspects of Debt Collection Law
However, even a debt rescheduling with the help of the Swiss Federal Government’s bridging loan may not really help a company to maintain its liquidity base in the long term. If, for example, a company needs the bridging loan it has received to pay back due debts to suppliers, its liquidity base is not further strengthened as a result. Although the consequences under debt enforcement and bankruptcy law may be averted in the medium term, liquidity will be lacking elsewhere.
In the current situation, it is therefore more advisable to talk to creditors in order to negotiate an extension of payment periods, a deferral of payment or instalments or to offer collateral for outstanding debts, e.g. in the form of a joint and several guarantee, in order to protect one’s own liquidity rather than to use it up.
On the other hand, companies should also protect themselves as creditors against their own customers and debtors in order not to run into a liquidity bottleneck. An expedient means of doing this could be to adapt their own invoicing process or to shorten their own payment deadlines so that their own invoices can be sent, paid or collected more quickly in the event of non-payment.
Defaulting debtors are currently benefiting from the ban on debt collection imposed by the Swiss Federal Council until 19 April 2020, as well as from the judicial vacations that have been in force since 21 March 2020 and the associated factual standstill in payment deadlines. For the time being, this may lead to relief or postponement. However, it should be borne in mind that debt collection and legal action will continue after the expiry of these deadlines and that the debtors’ obligation to pay will therefore not be suspended. It therefore seems appropriate here too for the company, as a creditor, to actively seek dialogue with its defaulting payers and to discuss payment options (e.g. insatlments), deferrals etc. before it is too late for both creditors and debtors.
As mentioned at the beginning, liquidity bottlenecks in companies can, in the worst case, lead to bankruptcy. This applies to both debtors and creditors. Only with joint solutions can payment difficulties and bankruptcies be averted. However, this requires communication between both parties. If, contrary to expectations, bankruptcy becomes unavoidable, the question arises of applying for a debt-restructuring moratorium from the court in order to gain time and negotiate with creditors about ways of paying off the debts.
- Ensuring Internal Processes and Procedures
In very many companies, the majority of employees currently work at home in home office. Since this situation is likely to continue for some time, it seems appropriate for companies to adjust and adapt their internal procedures and processes to this situation in the longer term in order to ensure that they remain operationally effective. This also includes reviewing and, if necessary, adjusting decision-making processes so that boards of directors and managements can remain capable of acting and fulfil their management responsibilities. For this reason, the necessary internal regulations, such as the Organizational Regulations, as well as deputy regulations or signature regulations, must also be reviewed so that the access the commercial bank account is ensured and all necessary powers of attorney are in place, for the case that due to a serious corona virus infection one or several employees are not available.
However, all operational aspects must also be critically examined to see whether they still function effectively under the changed circumstances and are implemented if staff are no longer present in person or are absent or if deliveries are not received or not received on time. Business plans have to be adjusted, inventories reviewed, orders and deliveries adjusted, prices and special offers considered, etc., in order to keep the business running.
The various measures and recommendations issued by the Federal Council must also be transferred into internal rules and regulations (e.g. a hygiene regulation), so that employees on the one hand can carry out their work safely and the employer has fulfilled its duty of care under labour law. However, it must also be ensured vis-à-vis customers and business partners that the business continues to run by maintaining communication and ensuring communication with the employees.
- Labour Law Aspects
The personnel is the most important capital of every company. Changes in the workforce are therefore the most drastic measures for any company. If the current crisis lasts for a longer period of time or worsens further, a reduction in personnel is likely to become an issue that every company must deal with.
In its explanations to the Emergency Ordinance (COVID-19 Solidarity Guarantee Ordinance), the Swiss Federal Council stated that companies should not cover their personnel expenses with the bridging loan, but rather with the COVID measures in the areas of short-time work and income replacement, which, unlike the bridging loan, do not have to be paid back. Accordingly, the necessary precautions and discussions must be made within the company at an early stage to ensure that applications for short-time work and income compensation are submitted in good time. In this context, it should also be noted that the authorities are currently flooded with such applications and longer processing times must therefore be expected.
If short-time work is not an alternative or solution for the entire workforce, agreements on wage reductions or deferrals, but also the receipt of unpaid holidays or changes in employment conditions may be a possible solution to save a company, its jobs, but also its liquidity requirements. However, this requires the involvement of both sides and open corporate communication so that both parties have clarity about the situation.
If a reduction in personnel should become inevitable, the notice periods in particular must be observed in good time in advance. In the case of mass dismissals, which can already be the case when more than 10 employees are dismissed, the prescribed notification procedures must also be observed to ensure that the notices of termination are not abusive.
- Contract Management
In addition to cash management and aspects of operating and labour law, great importance is currently also attached to contract management. All important contracts of a company should be critically reviewed, especially with regard to the question whether they can still be adhered to and implemented under the changed circumstances and what the consequences of breaches of contract are. Particular attention should be paid to whether Force Majeure Clauses or Material Adverse Changes Clauses are applicable, but also whether a possible breach of contract leads to premature termination of the contract or triggers compensation payments.
Here, too, it is advisable to contact contractual partners as early as possible in order to find solutions for any contractual difficulties and violations so that a contractual relationship can be maintained.
When concluding new contracts, the COVID-19 situation and the associated risks and consequences should also be taken into consideration. In a new contract, Force Majeure Clauses or Material Adverse Changes Clauses will hardly help, since COVID 19 is no longer likely to be a Force Majeure or Material Adverse Change Event. The other consequences triggered by the pandemic should also be sufficiently taken into account in the contract.
- Tenancy Law Aspects
The closure of businesses ordered by the Swiss Federal Council is currently affecting above all the hotel and restaurant industry and commercial enterprises with shop premises. In its COVID-19 Ordinance on Rent and Lease of 27 March 2020, the Swiss Federal Council decided to extend the payment periods for arrears in rent and ancillary costs incurred in the period between 13 March 2020 and 31 May 2020 to 90 days. This may give the companies concerned a deferment of payment, but does not exempt them from paying rent. As a result, many tenants are currently claiming that this is a defect of the rental property according to the Swiss Code of Obligations, as their businesses have been closed so that they do not have to pay rent. The legal situation in this regard has not yet been finally clarified and will probably require a court decision to provide clarity. However, it would at least give the tenants additional time. Landlords, on the other hand, are forced to do so economically, as they are dependent on their tenants paying their rent on time and they have to react to the non-payment of rent in order to preserve their rights. This can ultimately lead to a termination of the lease and, in extreme cases, to bankruptcy.
In this context, it is interesting to note that the two companies Adidas and H&M have announced that they are suspending their rent payments due to the current situation. This attitude of the two large companies has led to a lack of understanding, especially among the German population, that they are not showing solidarity and are evading their obligations in these times, while the rest of the population is not doing so. The damage to the image of these two companies caused by this is likely to be more serious than the rent payments owed.
In the context of a business closure, insurance-related questions may also arise if the company has taken out a business insurance policy that actually covers business losses. In this case, it must be examined whether this insurance can also be used in the event of a pandemic or whether the claim is excluded in this case.
Restructuring is also a means of overcoming the existing crisis. In this regard, it is necessary to decide whether parts of the company can or must be economically and/or legally split off, sold or closed down completely or temporarily in order to save costs and thus secure liquidity. These are decisions that regularly require long-term planning, which is why such measures should also be considered in advance, so that they can be implemented in time and show the corresponding effect.
As mentioned above, companies and entrepreneurs are currently well advised to consider the economic and legal consequences of the corona crisis for their company at an early stage. In addition to the economic consequences, the measures currently in force, but also the behaviour of all economic participants, have, above all, legally not inconsiderable effects which can not only severely impair and endanger the liquidity of a company, but also its existence.
As has been mentioned several times, good internal communication with employees, but also external communication with customers and business partners, is currently of great importance, as it creates the possibility and basis for solving problems together.
Furthermore, it is recommended that companies and entrepreneurs contact their advisors and specialists for the issues addressed today in order to deal with the risks and issues at hand. Some of the areas addressed, such as cash management, should be considered from the outset, while other issues, such as staff reduction and restructuring, only come into play in the event of a longer-lasting crisis. Nevertheless, every company and every entrepreneur should be prepared for this.
The lawyers of Bihrer Attorneys at Law Ltd. are at your disposal for proactive advice, for an analysis of the legal situation or for the implementation and review of measures.