Under Swiss law a foreign trustee of an insolvent foreign entity cannot act in relation to assets which are located in Switzerland, unless the respective foreign bankruptcy decree is recognised by a Swiss court. On recognition, a mandatory auxiliary insolvency procedure in Switzerland is initiated and a Swiss trustee is appointed. For a foreign bankruptcy decree to be recognised, the applicant must prove, among other things, that the state which rendered the bankruptcy decree would in turn recognise a Swiss bankruptcy decree (Articles 166 and following of the Code on Private International Law).
In a January 25 2018 decision the Zug Cantonal Court admitted an application by two Swiss creditors for recognition of a Singapore winding-up order. In particular, the court ruled that Singapore grants reciprocity within the meaning of Article 166(1)(c) of the Code on Private International Law, taking into account Singapore's recent implementation of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency.
The applicants were two entities domiciled in Switzerland which had outstanding claims under agreements for services performed out of Switzerland against a private company domiciled in Singapore limited by shares.
In 2016 the applicants requested that the Singapore High Court order the winding up of the Singapore entity. Based on Section 254(1)(e) (Chapter 50) of the Singapore Companies Act, the court granted the application and ordered the entity to be wound up.
In 2017 the applicants located substantial assets of the Singapore entity in Switzerland, mainly a claim by the Singapore entity against a Swiss company domiciled in Zug. Following the applicants' request, the Zug Cantonal Court ordered the freezing of these assets based on Articles 271 and following of the Swiss Code on Debt Collection and Bankruptcy.
On February 28 2017 Singapore implemented the UNCITRAL Model Law on Cross-Border Insolvency into its Companies (Amendment) Act 2017. The relevant provisions are contained in Articles 354A to 354C and the 10th Schedule of the Companies Act. In particular, Articles 15 and following of the 10th Schedule contain provisions for the recognition of a foreign insolvency proceeding and relief.
Based on this new legal framework, the applicants requested the recognition of the Singapore High Court's winding-up order by the Zug Cantonal Court, pursuant to Articles 166 and following of the Code on Private International Law.
Recognition of foreign bankruptcy decrees
The recognition of foreign bankruptcy decrees in Switzerland is subject to Articles 166 and following of the Code on Private International Law. Apart from a few conventions between Switzerland and some of the former German kingdoms,(1) no international treaties apply in such cases. In particular, the Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the Lugano Convention) does not apply to:
- bankruptcy;
- proceedings relating to the winding up of insolvent companies or other legal persons;
- judicial arrangements; or
- compositions and analogous proceedings (Article 1(2)(b) of the Lugano Convention).
According to Article 166(1) of the Code on Private International Law, a foreign bankruptcy decree rendered in the state of domicile of the debtor may be recognised in Switzerland on application by the foreign liquidator or a creditor if:
- the decree is enforceable in the state in which it was rendered;
- there are no grounds for refusal under Article 27 of the Code on Private International Law; and
- the state in which the decree was rendered grants reciprocity.
Jurisdiction lies with any court in whose territory assets of the foreign debtor are located.
Among other things, the applicant must show that the state which rendered the bankruptcy decree grants reciprocity. It is regarded as sufficient if the respective state is generally willing to cooperate with the Swiss authorities and if the state's insolvency rules allow for the inclusion of the foreign debtor's assets located abroad in Swiss insolvency proceedings.
On its recognition a foreign bankruptcy decree has the effects of bankruptcy as set out under Swiss bankruptcy law with respect to the assets of the debtor located in Switzerland (Article 170 of the code). Claims secured by way of a pledge and unsecured but privileged claims of Swiss-domiciled creditors take precedence over any foreign claims (Article 172(1)).
The Zug Cantonal Court held that the Singapore winding-up order constituted a bankruptcy decree in the sense of Article 166(1), taking into consideration the relevant provisions of the Companies Act. Further, the court held that Singapore now grants reciprocity pursuant to Article 166(1)(c), taking into account the recent implementation of the Model Law into the Companies Act. In particular, the court found that the 10th Schedule of the Companies Act provides that a Swiss bankruptcy decree may – under certain conditions – be recognised in Singapore. On recognition of a foreign decree, Singapore law allows the court to entrust the administration, realisation or distribution of all or part of the debtor's property located in Singapore to the foreign representative.
Finally, the court found that the other prerequisites for the recognition of the Singapore winding-up order pursuant to Article 166 were also met. Accordingly, it granted the applicants' request for recognition thereof and declared bankruptcy with effect to the Singapore entity's assets located in Switzerland and initiated an auxiliary insolvency procedure to be conducted by the Zug Bankruptcy Office.
The Zug Cantonal Court decision seems to be the first judgment of a Swiss state court affirming that Singapore now grants reciprocity in the sense of Article 166(1)(c) of the Code on Private International Law under the recently implemented Model Law.
The precondition of reciprocity has frequently been criticised in Swiss legal doctrine. In today's world of global trade, the current legal framework in Switzerland (in particular, the requirement of reciprocity) weakens a creditor's position in international insolvency proceedings. Swiss law is otherwise regarded as favourable for creditors and promotes the policy of equal treatment among creditors in insolvency proceedings. In the same vein, assets located in Switzerland should be made available to the foreign proceedings directly, once the foreign bankruptcy decree is recognised.
The Federal Council has recently recognised the need to modernise Articles 166 and following of the code and proposed a revision to the Federal Assembly. According to its draft of the revised code, the prerequisite of reciprocity is to be dropped entirely. Moreover, the mandatory auxiliary insolvency procedure need no longer be conducted if there are no claims secured by way of pledge or unsecured but privileged claims of Swiss-domiciled creditors or claims relating to the debtor's registered branch office. In such cases, the assets located in Switzerland will be directly made available to the foreign bankruptcy estate and the foreign liquidator will be entitled to dispose of the assets in the same manner as the debtor before he or she was declared bankrupt. However, the Swiss court granting recognition must verify that claims of Swiss-domiciled creditors are adequately protected in the foreign proceedings. Other proposed amendments include provisions regarding:
- the procedure (summary proceedings);
- the persons entitled to request recognition of a foreign bankruptcy decree (in addition to a creditor or foreign liquidator and the debtor); and
- national and international cooperation and coordination between authorities.
The Federal Assembly adopted the revised Code on Private International Law code on March 16 2018. It is expected to enter into force at the end of 2018 or early 2019.
For more information please contact Angelina Sgier or Martin Burkhardt at Lenz & Staehelin by telephone (+41 44 204 1212) or email ([email protected] or [email protected]). The Lenz & Staehelin website can be accessed at www.lenzstaehelin.com.
Endnotes
(1) 19th century conventions between Switzerland and Krone Wurttemberg, Bayern and Sachsen are still in force; cf Berti/Mabillard, Commentary on the Code on Private International Law, third edition, Basel 2013, Article 166 N 4 f).
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
