Liquidation: Dissolution of a Company in Switzerland

Switzerland offers a prosperous corporate landscape and is home to many thriving businesses; however, not all companies stand the test of time. If you find that your business is no longer working out, you may have to make the difficult decision to liquidate and dissolve it. In this article, we explore the liquidation process in Switzerland, including its possible reasons, effects, and the specific steps involved in liquidating different types of companies.

What is liquidation?

Liquidation is the process of selling off all a company’s assets in preparation to legally dissolve the business. The cash generated from the liquidation process is used to pay its debts and other obligations, while any remaining funds or assets are distributed to its shareholders.

Officially speaking, liquidation and dissolution of a company are two separate procedures. Once the company has liquidated its assets it may go through the process of officially deregistering which is known as dissolution. However, it is commonly understood that liquidation also refers to the ultimate dissolution of a business.

Why liquidate a company?

Why liquidate a company?

There are several reasons why you might consider (or be forced into) liquidating a company. A common cause of liquidation is insolvency, when a company is no longer financially able to repay its debts and remain profitable. However, forced liquidation arising out of bankruptcy is not the only reason to dissolve a company, and very often the decision is a voluntary one.

Some of the possible reasons to liquidate include:

• The shareholders decide that the company has fulfilled its purpose, or they wish to pursue different ventures,
• Declining market demand leading to lower profits or poor business prospects,
• Economic instability and uncertainty,
• Death of the main shareholder/owner,
• Owner retirement,
• Change of legal form (e.g. the conversion of a sole proprietorship into an AG requires the dissolution of the sole proprietorship),
• Insurmountable debts leading to forced liquidation,
• If the company is limited in time according to its statutes.

Who makes the decision to liquidate?

The issue of who decides to liquidate a company and how it is done depends on the specific situation at hand. In the case of bankruptcy or court proceedings, the decision is out of the shareholders’ hands and is enforced by court order. Otherwise, the dissolution must be decided by the shareholders’ meeting. The decision to dissolve a company (both for an AG and GmbH) requires a two-thirds majority of those represented at the meeting, and absolute majority of all voting share capital, for the decision to be passed.

The following are legally acceptable reasons to dissolve a company:

• There is a statutory limitation on the company which provides a reason to dissolve (e.g., the company is limited in time),
• The shareholders’ meeting decides to do so,
• Bankruptcy is declared,
• Other cases provided for by law.

What are the effects of liquidation?

Liquidating a company is a serious decision which has significant implications for the various stakeholders involved. It may be an emotionally charged time where some parties are satisfied with the process while others feel hard done by.

• Shareholders: The liquidation signals the beginning of the end of shareholders’ ownership in the company. Depending on the company’s financial position, they may receive a portion of the company’s remaining assets after all debts and obligations have been settled. If the company is completely insolvent though, shareholders may walk away with very little or nothing to show for their stake in the company.
• Creditors: A liquidation can be a promising sign for creditors who may have the opportunity to recover some or all their losses. On the other hand, creditors may end up feeling disappointed and angered if they end up getting little back from the bankruptcy proceedings.
• Employees: Employees may face difficulties in the form of job losses or financial hardship. If the company is extremely insolvent, they may be unable to adequately compensate their employees.
• The wider market: The general market might witness shifts in supply and demand dynamics because of the liquidation, potentially impacting related businesses. This is especially the case if a large or influential company becomes insolvent, which could have far-reaching effects on other businesses and even lead to cascading liquidations, particularly in the banking and financial services sectors.

It is important to note that in both the cases of a GmbH or AG facing liquidation, the company continues to exist as a legal entity until the liquidation and dissolution has been completed. The dissolved company enters into liquidation upon entry of the dissolution in the commercial register and bears the company name “in liquidation”. It should focus its activity on the steps necessary to complete the liquidation as efficiently as possible. This usually doesn’t involve immediately ceasing all business activities, because transactions should be completed properly to avoid unnecessary losses and try maximise the cash generated from liquidating. However, only actions that are necessary for the execution of the liquidation may still be taken.

What is the process for liquidating a stock corporation (AG) or limited liability company (GmbH)?

The liquidation process is similar for an AG and GmbH, with some minor differences in law. Articles 739 – 747 of the Code of Obligations (OR) outline the legalities of dissolution of a stock corporation (AG) with liquidation. Art. 821 – 826 (OR) outline the corresponding legalities of dissolving a limited liability company (GmbH). The similarities are evident, as in Art. 821a OR, it points out that the corresponding provisions found in stock corporation law (Art. 739 OR) also apply to the liquidation procedure for a GmbH.

We will outline the main steps involved in liquidating both of these company forms:

Step 1: Decision to dissolve the company

If the company is not forced to liquidate by a court judgement or bankruptcy, the directors or management will propose the dissolution and the shareholders approve the decision through a general meeting. Two thirds of the votes represented and an absolute majority of the voting share capital is required. The decision must be made in the presence of a public notary who issues a corresponding public document of the resolution. The decision along with its reasons must also be registered with the commercial register office.

Step 2: Appointment of the liquidator

The board of directors can often handle the liquidation themselves; however, in many cases, an official liquidator is advisable and may be appointed by the shareholders. This happens either due to statutory requirements, a decision at the general meeting, or by court order.

An official liquidator may be a licensed professional who is experienced in overseeing the liquidation process, who’s responsibilities include:

• Liquidating the company assets,
• Collecting outstanding creditor claims,
• Assessing the company’s balance sheet position,
• Resolving the company’s debts and obligations,
• Communicating with the appropriate authorities,
• Other necessary transactions.

Step 3: Liquidation balance sheet and debt call

This next stage is crucial. The liquidator must prepare a balance sheet when they take up their role, at which time the company’s assets and liabilities are thoroughly assessed. If over indebtedness is determined, the liquidator should immediately notify the judge and the company would be forced to declare bankruptcy.

Any creditors which appear in the company’s records or who are known by some other means must be sent a special notice informing them of the dissolution of the company. In addition, unknown creditors and those whose place of residence is unknown must be notified by means of a public announcement in the Swiss Official Gazette of Commerce (SOGC) (Art. 742 OR). This is known as a “debt call”, whereby all creditors with money owed to them by the company are requested to register their claims within a specified period.  

Step 4: Liquidation process and debt repayment

Having gone through the preliminary steps, the liquidation process itself can begin. This involves selling off the company’s assets, either through individual realisation or as a whole; terminating current business arrangements; and fulfilling the company’s duties and obligations. All activity of the company should be geared towards completing the liquidation as efficiently as possible, but it is important that they do not rush the process at the expense of recovering a fair value for the assets. As such, the liquidation process itself could take months and even years to complete.

Once the company’s assets are liquidated, their outstanding debts are settled in the order of priority outlined by Swiss corporate law. If the assets are insufficient to cover all debts, the company is declared bankrupt, and creditors are compensated in accordance with the amount recovered and the priority they are given. This is decided and overseen by a court of law.

Step 5: Distribution of remaining assets

On the other hand, if there are still assets remaining after the company has repaid all its debt, the liquidator will be in charge of distributing them to shareholders in accordance with their stake in the business, while factoring in any privileges enjoyed by individual shares.

Step 6: Deletion of the company from the commercial register

Once the liquidation is complete, the liquidator can file a notice with the commercial register to request the formal dissolution (i.e., deletion) of the company. This can only be done at least one year after the announcement of the debt call.

Are there any alternatives to liquidation?

Yes, there are alternatives to liquidation which should be carefully considered to potentially help avoid a lengthy liquidation process:

• Mergers and acquisitions: One common option is mergers and acquisitions (M&A), whereby a financially stable company might be willing to merge with or acquire a company which is facing financial difficulties.
• Restructuring: Another option, if the company is not yet at the point of complete insolvency or no return, is restructuring. This involves reorganising operations, reducing costs, and renegotiating debts to try regain financial stability.
• Shell company: Finally, if the company has managed to repay its creditors and therefore has no outstanding debt, it may be possible to expedite the process by selling the business as a shell company instead of dissolving it completely.

In all instances, the feasibility of these alternatives depends on the specific circumstances of the company.