A New Hope? The Swiss Government Adopts Its Dispatch To The Parliament On An Amendment To The Provisions Governing Recognition Of Foreign Insolvencies
On 24 May 2017, the Swiss Federal Council adopted its "Dispatch with respect to an amendment of the Private International Law Act (Chap. 11: bankruptcy and composition)" to the Swiss Parliament1, after a consultation procedure was conducted between 14 October 2015 and 5 February 20162.
The provisions of the Private International Law Act ("PILA"3) currently in force require, following the recognition of a foreign insolvency, the opening in Switzerland of an ancillary bankruptcy, the so-called "mini-bankruptcy", in which a local liquidator is appointed for the purpose of liquidating the assets located in Switzerland, with a priority given to the Swiss privileged and secured creditors in the distribution of the proceeds of such liquidation.
The draft amended PILA proposes five important amendments. First, the requirement of reciprocity would be abolished. Second, the insolvency decrees rendered at the "center of main interests - COMI" could be recognized in Switzerland. Third, in the absence of privileged or secured creditors, as well as of creditors of a Swiss branch of the foreign insolvent entity, the Court of the recognition could, upon request, waive the ancillary bankruptcy procedure in favor of recognizing the powers of the foreign insolvency trustee. Fourth, a legal basis would be created so as to allow Swiss authorities and bodies to cooperate with foreign bankruptcy authorities and bodies. Lastly, the bill provides that the ordinary (non-secured and non-privileged creditors) of Swiss branches of foreign entities in bankruptcy could be listed in the schedule of claims of the ancillary bankruptcy.
The law currently in force
The current provisions of the PILA on the recognition of foreign insolvencies are built around the antagonist principles of territoriality and of international cooperation.
In its 24 May 2017 dispatch, the Federal Council explains that pursuant to the principle of territoriality, insolvency decrees rendered outside of Switzerland have no effect on Swiss territory. Access to the Swiss assets of the debtor is granted only after recognition of the foreign insolvency decree.
PILA provides for two specific requirements to be met for the recognition of foreign insolvency decrees: the decree must have been rendered in the country of the seat or domicile of the debtor; and only the decrees issued by a country where Swiss insolvency decrees can also effectively be recognized can be subject to recognition in Switzerland (the principle of reciprocity).
The recognition of the foreign insolvency decree is currently necessarily followed by the opening of a Swiss ancillary bankruptcy. The Federal Council describes the ancillary bankruptcy as a procedure of mutual assistance, allowing international cooperation under the condition that certain (namely privileged and secured) Swiss creditors are satisfied in priority on the assets located in Switzerland.
Finally, the creditors of the Swiss branch of a foreign entity in bankruptcy can individually seek enforcement of their claims directly against the branch, outside of the ancillary bankruptcy proceedings.
Shortcomings of the current PILA provisions
The Federal Council identified several shortcomings in the current PILA provisions governing the recognition of foreign insolvencies.
It should be noted that Switzerland, not itself a member of the European Union, is surrounded by EU countries, which are, by necessity, its main commercial partners. While the European Parliament and the European Council adopted the recast Regulation 2015/848 of 20 May 2015 on insolvency proceedings, which gives jurisdiction to issue insolvency decrees to the courts where the debtor's COMI is located, Switzerland only recognizes insolvency decrees rendered in the State where the debtor has its seat or domicile. In practice, this discrepancy between European and Swiss law means that a debtor can be declared in bankruptcy in an EU State member (and recognized as such in the other EU State members) but continues to be considered in Switzerland as not being in bankruptcy because the insolvency decree was not issued at the company's seat. This asymmetric situation allows creditors in a foreign bankruptcy to seek individual enforcement of their claim on the assets located in Switzerland for their own interest and benefit. This harms the interests of the foreign bankruptcy estate and of the community of creditors. As such, the current Swiss rule that limits the possibility of recognition to the insolvency decrees issued in the State of the seat or domicile of the debtor is contrary to the principle of international cooperation that underlies the provisions of the PILA on recognition of foreign insolvency proceedings.
The Federal Council also points out the legal uncertainty about the right to dispose of the assets located in Switzerland. The question of who can dispose of these assets and in which manner is subject to an awkward and highly technical case law that, in practice, increases the costs, the length and the risks of the asset recovery process. Another complicating factor is that Article 271 of the Swiss Penal Code ("SPC") punishes unauthorized activities conducted on Swiss territory on behalf of a foreign authority (the "Swiss Blocking Statute").
The requirement of reciprocity also entails a significant increase of costs and length of the proceedings on recognition of the foreign insolvency decrees. To demonstrate that this requirement is met, the creditor or the foreign bankruptcy trustee has indeed to provide legal opinions and expertise on the foreign law on international...
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