Cross-border insolvencies are often complicated and time-consuming. In the regulated financial sector, significant efforts have already been made in Switzerland and internationally to streamline these processes and to facilitate cooperation between the relevant authorities across jurisdictions. Forthcoming changes to the Swiss Law on Private International Law (PILA) seek to modernise the general regime applicable in Switzerland to cross-border insolvencies outside of the regulated financial sector. The revised rules are expected to enter into force at some point in 2019.
What is this about?
When a debtor domiciled outside of Switzerland becomes insolvent, a foreign bankruptcy, composition or similar decree is generally without legal effect in Switzerland unless and until it has been formally recognized by the competent Swiss court. Absent such a recognition, creditors may still initiate specific enforcement measures against assets of the debtor in Switzerland, which may be disruptive for potential restructuring efforts of the debtor. Further, the possibilities for the foreign insolvency administrator to collect and repatriate the debtor's assets to the foreign insolvency estate are rather limited.
Even if the foreign insolvency decree is ultimately recognized in Switzerland, separate insolvency proceedings (so called 'secondary' or 'auxiliary' insolvency proceedings) must be carried out before the debtor's assets located in Switzerland can be made available to the foreign estate. Secondary insolvency proceedings are limited to certain secured claims and privileged claims of creditors domiciled in Switzerland. If the debtor has a branch in Switzerland, the secondary insolvency proceedings may run in parallel to Swiss insolvency proceedings regarding the branch. Which of the two proceedings may, or has to, take account of a particular asset of or claim against the debtor can be difficult to determine. The revision seeks to address the main deficiencies of the current regime.
Facilitated recognition of foreign insolvency decrees
The forthcoming changes to the PILA facilitate the recognition of foreign insolvency decrees in Switzerland. Two innovations stand out in this regard. First, it will no longer be a requirement that there is reciprocity with the jurisdiction in which the insolvency decree was issued. The reciprocity requirement has so far been an insurmountable obstacle for the recognition of insolvency decrees made in certain jurisdictions, including some within the EU. Secondly, in the future, a foreign insolvency decree may not only be recognized if it was issued in the jurisdiction of the debtor's place of residence or registered seat, but also of the centre of the (foreign) debtor's main interests. Accordingly, the revised PILA formally recognises the so called 'COMI-approach' followed in the EU.
As the claims that are taken account of in secondary bankruptcy proceedings are limited to certain secured and privileged claims, the need to carry out such proceedings before assets can be collected and transferred to the foreign insolvency estate can be inefficient or even counterproductive if the debtor has no, or only general unsecured, creditors in Switzerland. The revised PILA thus envisages that secondary bankruptcy proceedings can be dispensed with (albeit potentially subject to conditions or caveats) if there are no claims that would fall within the scope of such proceedings. In this case, the foreign insolvency administrator may, as a rule, carry out any acts in Switzerland to which it is empowered pursuant to the law of the main insolvency proceedings, in particular repatriate assets and litigate. That said, the foreign insolvency administrator must act in line with Swiss law and may not carry out sovereign activities or use compulsory powers.
The revised PILA specifically authorizes Swiss authorities and institutions to coordinate with their foreign counterparts if there is an objective connection between the relevant proceedings. What may seem like a formality can (and already has in insolvencies in the regulated financial sector) be a valuable legal basis in practice.
Improved coordination with branch insolvency proceedings
Another declared goal of the revision is to avoid parallel insolvency proceedings whenever possible if a debtor has an established branch in Switzerland. The new rules provide that separate branch insolvency proceedings can no longer be opened once the recognition of the foreign insolvency decree has been published. Instead, claims resulting from obligations entered into by the debtor for the account of a Swiss branch can generally be submitted in the secondary bankruptcy proceedings. Potential branch insolvency proceedings already opened prior to the recognition of the foreign insolvency decree are effectively unified with the secondary bankruptcy proceedings, provided that the schedule of claims in the branch insolvency proceedings has not yet become final. Essentially, therefore, unless branch insolvency proceedings are well advanced, secondary bankruptcy proceedings take precedence.
This modernisation of Swiss international insolvency law has been widely welcomed by stakeholders and practitioners alike and is expected to remove significant obstacles and inefficiencies of the current regime.