New Swiss International Insolvency Law
On March 16, 2018, the Swiss Parliament approved an overhaul of the Swiss international insolvency law. The amendments are expected to significantly facilitate the recognition of foreign bankruptcy and composition decrees in Switzerland.
The amendments concern the eleventh chapter on bankruptcy and restructuring of the Federal Act on Private International Law («PILA») and provide for several important changes. First and most importantly, the new rules facilitate the recognition of foreign bankruptcy and composition decrees in Switzerland by explicitly acknowledging the «COMI» approach and abolishing the former requirement of reciprocity. In addition, the new law provides for a long awaited coordination between branch bankruptcy proceedings and so called «secondary bankruptcy proceedings» that are opened in case of recognition of foreign proceedings in Switzerland. Finally, the revised law gives the foreign insolvency administrator the right, under certain conditions, to request dispensation of secondary bankruptcy proceedings, thereby enabling the foreign insolvency official to directly collect assets in Switzerland and, thus, accelerating the transfer of such assets to the foreign bankruptcy estate.
In the event bankruptcy, composition or similar proceedings are initiated with respect to a debtor domiciled outside Switzerland, the assets of the debtor located in Switzerland cannot be handed over to the foreign proceedings, and the foreign insolvency administrator is not allowed to collect assets located in Switzerland or take legal actions, unless and until the foreign proceedings have been recognized in Switzerland pursuant to articles 166 to 175 PILA. The procedure to be initiated in Switzerland pursuant to the PILA comprises the following steps:
- The foreign insolvency administrator or a creditor needs to request recognition of the foreign bankruptcy or composition decree. The request will be granted, if the conditions set out in article 166 PILA are met.
- If the competent Swiss court grants recognition of a foreign bankruptcy decree, the court opens auxiliary bankruptcy proceedings in Switzerland with respect to the assets of the debtor that are located in Switzerland (so-called «secondary bankruptcy proceedings»).
- Following liquidation of the assets located in Switzerland, the proceeds are used to pay down collateralized claims and privileged claims of creditors domiciled in Switzerland. In case of a surplus, its distribution depends on how the other claims of the creditors domiciled in Switzerland are treated in the schedule of accepted claims in the foreign bankruptcy. Only if the other claims of the creditors domiciled in Switzerland are adequately included in the foreign schedule of accepted claims will the surplus be handed over to the foreign bankruptcy proceedings. Otherwise, the surplus will be paid out to the creditors domiciled in Switzerland.
In addition to the recognition of a foreign bankruptcy or composition decree as described above, there is another procedure available if a foreign debtor has a branch in Switzerland. In this case, the law allows for the initiation of separate, however limited, bankruptcy proceedings with regard to the branch. These so-called «branch bankruptcy proceedings» are governed by the Federal Debt Enforcement and Bankruptcy Act (DEBA).
Pursuant to an amendment to the PILA that was approved by the Swiss Parliament on March 16, 2018, a number of important changes will be made to the existing Swiss international insolvency law, the key aspects of which are outlined hereinafter:
Facilitation of Recognition of Foreign Bankruptcy and Composition Decrees
Most importantly, the amendments made to the PILA are expected to significantly facilitate the recognition of foreign bankruptcy and composition decrees in various ways:
With respect to the formal requirements, the amended law states that not only the foreign insolvency administrator and the creditors but also the debtor himself will be entitled to submit an application for recognition, which may be of relevance for composition and similar proceedings.
As far as the substantive requirements are concerned, there are two significant changes: The first refers to the place where the relevant foreign bankruptcy | composition decree was issued. According to the current law, a foreign bankruptcy | composition decree may only be recognized in Switzerland if it has been issued in the state of the domicile of the debtor. In future, a foreign bankruptcy | composition decree will also be recognized in Switzerland if it has been issued in the state in which the center of the debtor’s main interests is situated, provided that the debtor did not have its domicile in Switzerland when the bankruptcy | composition proceedings were opened abroad. The new rules specifically aim to ensure that bankruptcy and composition proceedings initiated in accordance with Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 in the state where the center of the debtor’s main interests is situated («COMI» approach) can be recognized in Switzerland. The second change relates to the reciprocity. In contrast to the current law, the revised law no longer requires that the state where the decree was entered grants reciprocity. This prerequisite in the past has turned out to complicate the procedure of recognition of bankruptcy and composition decrees without bringing any benefit to the creditors.
Coordination of Branch Bankruptcy Proceedings and Secondary Bankruptcy Proceedings
The new law also provides for a number of amendments with a view to coordinate branch bankruptcy proceedings and secondary bankruptcy proceedings. The availability of the two proceedings has repeatedly lead to unclear situations, since in the past, they could take place simultaneously, but with different estates (the branch bankruptcy estate encompasses the assets that functionally belong to the branch and serves to pay creditors whose claims are derived from the operations of such a branch).
Under the revised PILA, if the debtor has a branch in Switzerland, the application for recognition of a foreign bankruptcy decree must be filed with the court at the location of the debtor’s branch in Switzerland. The primacy of the jurisdiction at the place of the debtor’s branch lays the foundation for the coordination of branch bankruptcy proceedings with secondary bankruptcy proceedings.
Furthermore, the new law provides for an Integraion of branch bankruptcy proceedings into secondary bankruptcy proceedings. The consolidation takes place, if either the foreign bankruptcy decree was recognized in Switzerland before branch bankruptcy proceedings are initiated, or if branch bankruptcy proceedings have started before the schedule of accepted claims in branch bankruptcy proceedings has become final. To integrate branch bankruptcy proceedings into secondary bankruptcy proceedings, a third category of claims will be included in the schedule of accepted claims in secondary bankruptcy proceedings. Pursuant to the new rule, not only collateral secured claims and privileged claims of creditors domiciled in Switzerland will be accepted, but also claims that are derived from operations of the branch. Consequently, there will only be one bankruptcy proceeding and only one bankruptcy estate. However, compared to the present rule, the proceeds of the sale of the debtor’s assets will be distributed among more creditors. In future, creditors of (unsecured and unprivileged) claims that derive from operations of the Swiss branch will be paid out as well before any surplus is handed over to the foreign insolvency proceedings.
Dispensation of Secondary Bankruptcy Proceedings
The revised law gives the foreign insolvency administrator the right, under certain conditions, to request dispensation of secondary bankruptcy proceedings, thereby enabling the foreign insolvency official to directly collect assets in Switzerland and, thus, accelerating the transfer of such assets to the foreign bankruptcy estate.
However, before such a request can be made, it needs to be ascertained by way of a creditors call whether or not there are any creditors who are entitled to request payment in the secondary bankruptcy proceedings (see above “Coordination of Branch Bankruptcy Proceedings and Secondary Bankruptcy Proceedings”). The further proceedings depend an whether any such claims are produced:
- If any claims are produced that belong to one of the three categories of claims entitled to be paid out in the secondary bankruptcy proceedings, the proceedings have to be carried out. However, the foreign insolvency administrator has the possibility to fulfill these claims in order to accelerate the transfer of assets located in Switzerland to the foreign insolvency proceedings.
- If claims are produced, but none of them belongs to one of the three types of claims to be included in the schedule of accepted claims, dispensation of secondary bankruptcy proceedings is possible, but only under the condition that these claims will be adequately compensated in the foreign insolvency proceedings.
- If no claims are produced at all, dispensation of secondary bankruptcy proceedings is possible.
If dispensation is granted, no secondary bankruptcy proceedings will be opened, and the foreign insolvency administrator, with due respect to Swiss law, has the same powers in Switzerland as he «has pursuant to the law of the state where bankruptcy proceedings were initiated. In particular, the administrator is allowed to collect assets located in Switzerland, including by way of litigation, and to include them in the foreign insolvency proceedings.
The effective date of the aforementioned amendments to the PILA is yet to be announced by the Swiss Federal Council but is expected to be in 2019 at the earliest. Following their enactment, the new rules are expected to significantly facilitate the recognition of foreign bankruptcy and composition decrees in Switzerland.