Switzerland: New Rules Relating To The Recognition In Switzerland Of A Foreign Bankruptcy Or Restructuring Order

Insolvency and international cooperation in insolvency matters have been subject to recent developments, particularly in the European Union but also internationally, as mandated by the UNCITRAL. Switzerland however, did not participate in these modernization processes, except in the banking field. Switzerland has now adopted modern and competitive regulations, thereby unifying the entire applicable legislative system.

1 GENERALITIES

European law (Regulation 1346/2000 and, subsequently 2015/848) has long provided for the principle of automatic recognition of decisions initiating insolvency proceedings against a debtor and other related decisions, "without further formality'.

This is not the case in Switzerland, whose private international law has always strictly enshrined the principle of "flexible" territoriality. Pursuant to law prior the legislative amendment, any foreign bankruptcy order, or any other related decision, was subject to formal judicial recognition proceedings before the decision in question could be applied in Switzerland, and access to the debtor's assets located in Switzerland could be authorized. Further, recognition was not automatic, as certain conditions had to be met. 

The Swiss Parliament has recently adopted new rules aiming at facilitating the recognition of bankruptcy and related decisions, to simplify the recognition proceedings and to improve coordination with foreign proceedings.

2 CURRENT PROCESS OF RECOGNITION

2.1 CONCERNED DECISIONS

The recognition and enforcement of foreign insolvency decisions in Switzerland is governed by Articles 166 et seq. of the Federal Act on Private International Law of 18 December 1987 (PILA). Bankruptcy judgments rendered by foreign Courts fall within the material scope of application of the aforementioned provisions. Other judgments similar to bankruptcy judgments, rendered in the event of insolvency, or any provisional measures applicable in the event of insolvency, shall also be recognized and enforced in accordance with these provisions.

Articles 166 et seq. PILA constitutes a specific corpus of laws, which applies exclusively to insolvency decisions. Foreign decisions related to insolvency proceedings are outside the material scope of application of the Lugano Convention. Decisions issued due to the insolvency of the debtor, having the effect of limiting the debtor's capacity to dispose of its assets, for the purpose of instigating liquidation or forced restructuring of its debt, typically consist of bankruptcy judgments or similar decisions.

Foreign judgments against a debtor who is active in the financial markets sector, an activity subject to authorisation, are recognized under the Federal Act on banks and saving banks, and according to the FINMA's ordinance on bank insolvency. Those decisions remain outside of the material scope of application of the Articles 166 et seq. PILA.

2.2 CURRENT CONDITIONS FOR RECOGNITION

The amended provisions essentially provide currently the following:

  • Recognition is required either by the foreign bankruptcy administration or its equivalent in a restructuring procedure, or by a creditor;
  • The recognition request shall be filed within the Court where the assets are located;
  • The decision rendered is enforceable;
  • The decision has been rendered in the State of the registered office, or domicile of the debtor;
  • Reciprocity is granted; only foreign insolvency decisions rendered in States which recognize decisions issued by Swiss authorities are recognized in Switzerland.
  • There is no reason for refusal (such as a violation of the public order, irregular summons, violation of fundamental procedural rights, res judicata).

2.3 CONSEQUENCES OF RECOGNITION

According to the current regulation, the recognition of a foreign insolvency decision has the effect of initiating ancillary bankruptcy proceedings in Switzerland limited to the debtor's assets located in Switzerland. In these proceedings, only secured creditors and privileged creditors domiciled in Switzerland (such as workers, social insurances) are paid off. Any positive balance is then transferred to the foreign bankruptcy estate after recognition in Switzerland of the foreign colocation status. If the repayment schedule cannot be recognised, the balance is distributed among the Swiss ancillary bankruptcy non-preferred creditors.

A claw-back action can be opened in Switzerland by a foreign bankruptcy administration only after recognition in Switzerland of the foreign bankruptcy decision, and only if the administration of the ancillary bankruptcy as well as the Swiss privileged creditors have renounced such action (cascade system).

2.4 THE PARTICULAR CASE OF THE BRANCH

In Switzerland, the branch of a foreign legal person registered in the commercial register, may be sued and declared bankrupt for debts arising from its operations. If there is a branch of a foreign legal entity in Switzerland, this also means that the legal entity owns assets in Switzerland. The consequences of the above, is that currently two competing proceedings are likely to be initiated in Switzerland. An ancillary bankruptcy covering all the assets in Switzerland of the foreign legal person, as well as an ordinary bankruptcy limited to the assets of the branch. In the former proceeding, only secured and privileged creditors domiciled in Switzerland are paid off, whereas in the latter, all creditors may be paid.

"Herein, Swiss law notably aligns itself with European law and its concept of COMI."

3 MAIN CHANGES

3.1 TERRITORIAL COMPETENCE

Hence, both a decision rendered by the authority of the State in which the debtor holds its registered office or domicile, and a decision rendered in the State in which the debtor has its centre of main interests (COMI) may be recognised in Switzerland. Herein, Swiss law notably aligns itself with European law and its concept of COMI.

Recognition will be rejected if the debtor had its domicile or registered office in Switzerland at the time the proceedings were initiated abroad, even if the debtor's centre of main interests is situated abroad.

3.2 AUTHORITY TO PROCEED

Under current law, the authority to request recognition of a foreign insolvency decision was solely attributed to the bankruptcy administration and creditors, to the exclusion of the debtor itself.

If this rule is understandable in the context of a bankruptcy, whereby the debtor loses in principle all capacity to dispose, and all capacity to act, it became problematic within the context of recognition of decisions in relation to the restructuring of the debtor (concordat, or similar proceedings). Indeed, in such circumstances, it is generally the debtor who is the first, or even the only party, to be aware of the situation. Moreover, in restructuring proceedings, it is common that the debtor's capacities are not restricted.

Hence, the debtor whose capacities are not limited by the decision to be recognised will also be granted the authority to proceed in Switzerland in view of said recognition. In any case, no automatic recognition is expected.

3.3 REMOVAL OF THE RECIPROCITY REQUIREMENT

The reciprocity requirement was introduced in 1983 to "contribute to strengthen the mutual desire for cooperation" (FF 1983 I 438). This condition had to be verified ex officio by the judge. In practice, the reciprocity requirement leads to:

  • An increase in the costs of the proceedings by forcing the applicant to have one or more expert reports prepared almost systematically, at its own expense, in order to demonstrate that the reciprocity requirement is met;
  • Lengthening of the proceedings' recognition period because of the need for evidence of reciprocity;
  • Unequal treatment between creditors when reciprocity is not recognized because, in such a case, recognition is refused and each creditor may individually attack the debtor's assets.

Parliament has therefore decided to strike the reciprocity requirement from law. In the future, it will be sufficient and required to have a foreign decision enforceable in the State where it was rendered, with no reason for refusal, and to evidence that it was rendered by the competent authority pertaining to said State.

"Parliament has therefore decided to strike the reciprocity requirement from law."

3.4 TRANSFER OF THE ESTATE WITHOUT ANY ANCILLARY BANKRUPTCY

The initiation of ancillary bankruptcy proceedings is solely justified when Swiss creditors' interests have to be protected (privileged creditors who have their domicile in Switzerland, to whom non-privileged creditors can be added when the debtor owns a branch registered in the Swiss Commercial Register in Switzerland). In the absence of Swiss creditors, the initiation and the execution of ancillary proceedings at the expense of the Swiss entity's enforcement proceedings, loses its relevance.

The legislator has chosen to conditionally authorize the transfer of assets located in Switzerland without initiating ancillary bankruptcy proceedings. In actuality, the new system will be as follows:

  • A request for recognition (which can be qualified as "simplified") will have to be filed, which must expressly conclude that the conduct of ancillary bankruptcy proceedings should be waived.
  • The creditors will be advised by public notice, published by the Swiss enforcement proceedings administration, in order to ensure that no Swiss creditors rights must be protected.
  • In the absence of any reaction from Swiss creditors, the Swiss enforcement proceedings entity will inform the enforcement court accordingly; the court will thereby be able to authorise the direct transfer of assets to the competent foreign authorities, attaching conditions or obligations.

3.5 CLAW-BACK ACTION

The initiating of claw-back actions in Switzerland by a foreign bankruptcy administration appeared to be problematic.

The rendered foreign judgments in revocatory matters could not be recognised, in order to prevent bypassing of the obligation to act within an ancillary bankruptcy, by the foreign bankruptcy's administration.

Furthermore, the initiating of revocatory actions was not possible unless an ancillary bankruptcy was initiated, and only if the Swiss enforcement proceedings entity, and the Swiss creditors, waived their right to proceed.

Henceforth, the foreign bankruptcy administration will be entitled to get a foreign decision ruling on a duly recognised revocatory action. This will however, be limited to the scope of ancillary bankruptcy proceedings.

3.6 CONNECTION BETWEEN A BRANCH BANKRUPTCY AND AN ANCILLARY BANKRUPTCY

The relation between a branch bankruptcy and the recognition of a foreign bankruptcy decision, resulting in the initiation of ancillary bankruptcy proceedings regarding the debtor's sole assets located in Switzerland, is hence settled differently in order to prevent the initiating of parallel proceedings.

Assuming that at the moment the foreign bankruptcy order is recognized, a bankruptcy proceedings is already pending as regard the branch, the branch proceedings will be stayed and all creditors will be repaid in the framework of the ancillary proceedings, except if the branch proceedings can no more be stayed (because repayment of the creditors started); in such a case, the two proceedings shall still coexist.

4 CONCLUSION

Among the adopted amendments, the relinquishment of the reciprocity criteria and the transfer of assets without any ancillary bankruptcy proceedings must be particularly emphasized.

"The transfer of assets without any mini bankruptcy proceedings is a major innovation resulting from banking regulations."

With the relinquishment of the reciprocity requirement, quite unjustifiable and misunderstood from a creditors' point of view, and unique to the Swiss law now being abandoned, Switzerland has joined the long list of notably European States for which a recognition decision is a mere formality.

Unequal treatment caused by the absence of reciprocity has also been remediated: indeed, in the absence of recognition, each creditor, individually, could sue the debtor in Switzerland, favouring the fastest creditors and those having the necessary funds to finance the recovery proceedings.

The transfer of assets without any mini bankruptcy proceedings is a major innovation resulting from banking regulations. It puts an end to an expensive anomaly. Indeed, prior to the current act, in the absence of any creditor in Switzerland, the Swiss authorities had to liquidate the Swiss mini bankruptcy.

The other amendments are also a welcome change, since they also bring greater simplification and harmonisation. The only regret that can be expressed is the absence of a comprehensive new regulation regarding the coordination and information exchange with the foreign entities, which is the subject of only one, broadly expressed, law provision. The date on which the new bill shall come into force is not yet known.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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