21 September 2016

Modernisation of International Bankruptcy Law

The recognition of foreign bankruptcy proceedings in Switzerland is governed by the international bankruptcy law. As some of the applicable recognition requirements have proven to be problematic in practice, the Federal Council intends to modernise the legislation in order to facilitate the recognition of foreign bankruptcy decrees.

Shortcomings of the Existing Bankruptcy Law
Due to the territoriality principle, foreign bankruptcy decrees basically have no effect in Switzerland. To access debtor's assets located in Switzerland, it is first necessary for the foreign bankruptcy decree to be recognised. To this end, a request for recognition must be filed in Switzerland. It is necessary that the bankruptcy decree has been issued in the country of residence or domicile of the debtor and that the state in question grants reciprocal rights. The recognition of a foreign bankruptcy decree leads to the implementation of a so-called "auxiliary bankruptcy" in Switzerland, under which preference is given to certain domestic creditors.

Main Deficiencies
In particular, the current law results in the following problems:

  • Bankruptcy decrees issued at the locus of the main interests of the debtor (which is, for example, often the case in EU countries), are not recognised, unless the locus is the seat. This leads to limping legal relationships: Bankruptcy proceedings are opened against the debtor in one place, but not in another location. This calls into question the equality of creditors.
  • The reciprocity requirement is expensive and has not improved the foreign willingness to cooperate.
  • The mandatory implementation of an auxiliary bankruptcy and the limitation of the capabilities of the foreign bankruptcy trustee are inefficient. In addition, there may be coordination problems between auxiliary bankruptcy procedures and bankruptcy procedures of a branch located in Switzerland.
  • Under the current law a foreign bankruptcy trustee is prohibited – with possible penal sanctions – from operating in Switzerland. In particular, he must not: engage in any debt collection activities, bring an action against the debtor of the bankrupt or enter a claim in the bankruptcy of the debtor in Switzerland.

Before the foreign bankruptcy decree is recognised, the foreign bankruptcy trustee is not authorised to raise legal challenges in Switzerland for the return of assets to the bankrupt estate. At the same time foreign decisions on legal challenges will not be recognised in Switzerland.

Proposed New Regulations
The changes proposed by the Federal Council build on the existing regulations and will facilitate the recognition of foreign bankruptcy decrees. The main points of the proposal are:

  • The reciprocity requirement should be waived.
  • In future, decrees issued at the locus of the main interests of the debtor will also be recognised.
  • It should be possible to waive an auxiliary bankruptcy procedure if there is no need to protect domestic creditors. In this case the powers of the foreign bankruptcy trustee should be expanded. If an auxiliary bankruptcy procedure occurs, it should be better coordinated with any bankruptcy procedure of a branch located in Switzerland.

Finally, bankruptcy related decisions on legal challenges will also be recognised.

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Categories: Restructuring & Insolvency

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