Due to the prevalence of the territoriality principle in Swiss bankruptcy law, a foreign bankruptcy trustee's powers to act in Switzerland are limited. In general, a foreign trustee is not allowed to collect assets located in Switzerland, even if it is competent to act under the applicable foreign law. A foreign bankruptcy trustee may, in principle, only apply for recognition of the foreign bankruptcy decree and request protective measures.
To meet the prerequisites for recognition of a foreign trustee's or creditor's application filed with the Swiss court, Article 166 of the Code on Private International Law provides that a foreign bankruptcy decree issued in the debtor's state of domicile shall be recognised in Switzerland only if:
- the decree is enforceable in the state where it was entered into;
- such recognition is not manifestly incompatible with Swiss public policy; and
- reciprocity is accorded in the state where the decree was entered into.
Where prerequisites for recognition are met, in principle the foreign bankruptcy decree will have the effect of bankruptcy under Swiss law. However, if there are privileged creditors domiciled in Switzerland (eg, employees or beneficiaries of alimony payments) or creditors secured by a pledge located in Switzerland, the competent Swiss court will recognise the foreign decree and the Swiss Bankruptcy Office will initiate a special kind of auxiliary proceeding (known as a mini-konkurs) on the assets located in Switzerland. For this proceeding, Article 173(1) of the Code on Private International Law states that after distribution to privileged creditors and creditors secured by a pledge, the balance of the bankruptcy estate shall be remitted to the foreign bankruptcy trustee (or to those creditors entitled thereto under applicable foreign law). However, this surplus may not be made available until the foreign schedule of creditors has also been recognised by the competent Swiss court.
In the case of a mini-konkurs, the foreign trustee's scope of action is limited. For example, it may initiate clawback claims in Switzerland on its own only if the Swiss-appointed liquidator and scheduled creditors in Switzerland renounce the right to initiate such proceedings.
On June 6 2014 the Federal Supreme Court (Case 5A_450/2013) confirmed its longstanding practice that a foreign bankruptcy decree issued in the debtor's state of domicile shall have legal effect in Switzerland only if and when it is recognised according to Article 166(1) of the code. As the foreign bankruptcy decree had not been recognised in Switzerland, it could not be taken into account in this case.
In the same proceedings, the appellant sought the recognition of a Brazilian decree regarding a cramdown issued before bankruptcy occurred.
In insolvency proceedings where a composition procedure or similar foreign procedure has been initiated, the foreign decree approving the composition agreement must also be recognised in Switzerland according to Article 166 and following in order to have legal effect in Switzerland. The court made clear that according to Article 170 and following, once a foreign composition approval has been recognised in Switzerland a mini-konkurs will be necessary only if there are privileged creditors with seats in Switzerland or creditors secured by a pledge located in Switzerland (the same applies to foreign bankruptcy proceedings).
In the event that there are no such creditors, a mini-konkurs is unnecessary. If there are no measures to be taken in Switzerland and the foreign trustee has only to seek that the assets located in Switzerland must be put to the disposal of foreign composition, it is unnecessary to appoint a Swiss liquidator. However, if measures of execution or constraint are necessary in Switzerland, the foreign trustee must request such measures from the competent Swiss court or enforcement authorities. Hence, the competent Swiss court may not only recognise the foreign decree, but also give legal effect to the foreign measures taken according to the decree, either by empowering the foreign liquidator to act or appointing a co-liquidator in Switzerland.
Case 139 III 236
On February 18 2013 the Federal Supreme Court (Case 139 III 236) dealt with whether a foreign trustee would be entitled to pursue a lawsuit under exclusion of Article 166 if a claim is deemed to be unrelated to assets located in Switzerland. In this case a counterclaim was submitted by a defendant domiciled in Switzerland against a German trustee. The counterclaim referred to the main claim regarding a settlement agreement concluded by the German trustee. The settlement agreement was related to an asset located in Switzerland (ie, real estate property) the proceeds of which should have been contributed to the German bankruptcy estate. In the counterclaim, the defendant requested that the settlement agreement be annulled.
Given that neither party applied for recognition of the settlement agreement according to the code, the first-instance court denied the German trustee as a defendant for the counterclaim since, according to Article 166 and following, the foreign trustee had no right to act in Switzerland.
In the appeal proceedings, the defendant argued that the first-instance court's decision was incorrect as the counterclaim would not be related to assets located in Switzerland and would refer only to the annulment of the settlement agreement. Further, the defendant stated that the counterclaim would have a civil law nature rather than a bankruptcy law nature, and for this reason Article 166 should not apply.
The court did not entirely answer whether, in principle, a foreign bankruptcy trustee should be allowed to pursue a lawsuit under exclusion of Article 166 if a claim is not related to assets located in Switzerland. In this case, the court concluded that the defendant's counterclaim had a material link to the foreign bankruptcy trustee's efforts to collect the debtor's assets in the bankruptcy estate. According to the court, the material link was given because:
- the conclusion of the settlement agreement must be qualified as collection measures; and
- the main claim and counterclaim were based on this settlement agreement, referring to an asset located in Switzerland.
The court stated that the counterclaim was of a bankruptcy law nature and related to assets in Switzerland. Taking into account that no efforts were made with regard to recognition according to Article 166(1), the court decided that the first-instance decision to reject the counterclaim against the foreign bankruptcy trustee, based on the argument that it was not allowed to be a party to proceedings, was in line with Swiss law.
Insolvency proceedings of any kind can be tedious, and recognition and enforcement of an insolvency decree can be particularly difficult.
The first compulsory step for a foreign bankruptcy trustee or liquidator in Swiss territory is to seek recognition of the foreign insolvency decree, as most claims filed with Swiss courts will normally be materially linked to assets located in Switzerland.
Depending on what the foreign bankruptcy administration or liquidator wants to do in Switzerland, it should be aware that in most cases it cannot act alone. Therefore, it would be wise for the foreign trustee or liquidator to seek legal advice before initiating any kind of proceedings.
The Swiss legislature is working on a revision to clarify the existing situation and move towards a more foreign-bankruptcy-friendly legislation.
Stéphanie Oneyser & Jonas Walker
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