"title": \"Opening of bankruptcy proceedings against a public limited company due to failure to file

Facts

{ "title": \"Opening of bankruptcy proceedings against a public limited company due to failure to file a notification of over-indebtedness despite alleged subordination agreements and foreign exchange gains", \"facts": \"

Parties and procedural history:

The appellant is a public limited company registered in the Commercial Register with its registered office in Zurich (the “Company”). Its board of directors included, among others, C., a Russian national resident in Russia. The Company’s auditors were B. AG (the “Auditors”).

In a letter dated 10 July 2023, the Auditors informed the Company that, in the course of a limited audit of its annual accounts as at 31 December 2022, they had identified over-indebtedness. The Company was required to be restructured within a short period CO the court had to be notified. The Auditors set the Company a deadline until 10 August 2023 and stated that they would notify the court if they received no response. The Company failed to meet this deadline.

On 10 August 2023, the Auditors filed a notification of over-indebtedness with the Zurich District Court (the “first-instance bankruptcy court”) and stated that the Company was obviously over-indebted and that its board of directors had neither proposed restructuring measures nor submitted subordination agreements despite the deadline set.

By judgment dated 5 December 2023, the first-instance bankruptcy court opened bankruptcy proceedings against the Company and instructed the Zurich Altstadt Bankruptcy Office to implement them. The Company appealed against this decision to the Higher Court of the Canton of Zurich (the “Higher Court”), which dismissed the appeal by decision dated 25 January 2024 and reopened the bankruptcy proceedings with effect from that date.

The Company in liquidation then filed an appeal in civil matters with the Federal Supreme Court on 26 February 2024. It sought the annulment of the Higher Court’s decision of 25 January 2024 and of the bankruptcy opening. In the alternative, it requested that the matter be referred back to the lower court for reassessment.

Legal background and points in dispute:

The Company argued that it had not been over-indebted either as at 31 December 2022 CO as at the end of April 2023. It further contended that sufficient subordination agreements had been concluded to cover the over-indebtedness. Finally, it claimed that the exchange rate of the subordinated loans (denominated in Russian currency) had moved in its favour as at 30 June 2023, resulting in a foreign exchange gain of approximately CHF 419,000. This gain should have been recognised as an asset in a balance sheet as at 30 June 2023 at realisation values, thereby covering the over-indebtedness.

The Higher Court and, before it, the first-instance bankruptcy court, however, considered the Company to be over-indebted and based their findings on the documents submitted by the Auditors and the Company’s lack of cooperation. The Company subsequently complained to the Federal Supreme Court in particular of a violation of Art. 725b CO, Art. 729c CO and Art. 192 DEBA. Among other things, it argued that there had been no obvious over-indebtedness and that the Auditors had qualified their notification of over-indebtedness of 10 August 2023 as no longer applicable in a letter dated 20 December 2023. Moreover, neither the annual accounts as at 31 December 2022 nor an interim balance sheet at going-concern CO realisation values had revealed any obvious over-indebtedness.

The Company further argued that it had never been requested to prepare and submit an (audited) interim balance sheet. It also claimed to have made substantiated submissions refuting the over-indebtedness. Finally, it stated in detail that it had sufficient subordination agreements in place to cover the over-indebtedness.

• Conduct of the Auditors:
• The Auditors initially identified over-indebtedness at going-concern values, but later corrected this assessment in a letter dated 20 December 2023 and confirmed that there was no longer any obvious over-indebtedness.
• The Company disputed that it had ever been over-indebted and argued that the subordination agreements and the foreign exchange gains covered the over-indebtedness CO even prevented it from arising in the first place.

Decisions of the lower courts:

The first-instance bankruptcy court and the Higher Court, however, considered the Company to be over-indebted and based their findings on the documents submitted by the Auditors and the Company’s lack of cooperation. The Company had breached its duty to cooperate by neither preparing nor submitting an interim balance sheet nor responding to the requests of the Auditors CO the lower courts. Moreover, it had made substantiated submissions that did not refute the over-indebtedness.

", \"reasoning": \"

Investigation principle and duty to cooperate:

The Federal Supreme Court first emphasises that, pursuant to Art. 255 lit. a CPC, the bankruptcy court must establish the facts ex officio. This does not, however, relieve the parties of their active duty to cooperate. They must inform the court of facts relevant to the decision and identify the available evidence (BGE 130 III 102 para. 2.2; Judgment 5A_354/2016 of 22 November 2016 para. 4.1).

In the present case, the Company breached its duty to cooperate in several respects. It did not respond to the request of the Auditors CO to the orders of the first-instance bankruptcy court. Moreover, it made substantiated submissions that did not refute the over-indebtedness. Finally, it stated in detail that it had sufficient subordination agreements in place to cover the over-indebtedness.

The Federal Supreme Court notes that the Company breached its duty to cooperate by neither preparing nor submitting an interim balance sheet nor responding to the requests of the Auditors CO the lower courts. Moreover, it made substantiated submissions that did not refute the over-indebtedness.

Requirement of a notification of over-indebtedness:

The Federal Supreme Court confirms the consistent case law according to which the opening of bankruptcy proceedings due to over-indebtedness pursuant to Art. 192 DEBA in conjunction with Art. 725b para. 3 CO requires a formal notification of over-indebtedness. Such a notification may only be filed by the board of directors, the auditors CO an approved auditor. The bankruptcy judge may not open bankruptcy proceedings on his CO her own initiative, even if he CO she becomes aware of a possible over-indebtedness in some other way (Judgments 5A_790/2017 of 3 September 2018 para. 3.3.3; 5A_625/2015 of 18 January 2016 para. 3.4; 5A_587/2011 of 9 November 2011 para. 4.3).

The subsidiary duty of the auditors, in the event of obvious over-indebtedness and persistent default by the board of directors, to notify the court constitutes an act in lieu of performance by a defaulting board of directors. Its purpose is to prevent the postponement of bankruptcy and to protect creditors and the public from the company remaining in legal transactions despite being over-indebted (BGE 127 IV 110 para. 5a; Judgments 5A_517/2011 of 16 December 2011 para. 3.1; 5A_221/2008 of 10 July 2008 para. 2.3).

Irrevocability and correctability of the notification of over-indebtedness:

The Federal Supreme Court notes that the notification of over-indebtedness is a statutory duty and cannot be withdrawn, but can only be corrected (Judgment 5A_625/2015 of 18 January 2016 paras. 3.2.2 and 3.4.4; Judgment of the Federal Supreme Court of 15 January 1945, in: BlSchK 1945 p. 62 ff.). If it transpires that the company is not over-indebted CO that there is no longer any over-indebtedness at the time of the decision, the judge may not open bankruptcy proceedings (JAGMETTI/TALBOT, loc. cit., p. 272).

Requirements for proof of over-indebtedness:

The Federal Supreme Court confirms that over-indebtedness must be proven both at going-concern values and at realisation values, unless the company is capable of continuing as a going concern. In assessing whether over-indebtedness is obvious, it is sufficient that it clearly results from the circumstances (Judgments 4A_505/2007 of 8 February 2008 para. 4.1.2; 4C.117/1999 of 16 November 1999 para. 1a).

In the present case, the Auditors initially identified over-indebtedness at…