Insufficient Information Summary

According to a 2006 publication by N.B. Hartmann and M. Koch, Swiss insolvency legislation is based on the 1889 Federal Act on Debt Enforcement and Bankruptcy, as amended. This act is supplemented by other legislation relating to enforcement at the level of canton and commune and by laws specifically dealing with financial institutions, insurance companies, and other special cases. However, there is insufficient publicly available information that directly addresses the Swiss insolvency regime and its performance with regard to the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank.

General Overview

There is insufficient publicly available information that directly addresses the Swiss insolvency regime and its performance with regard to the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank. According to N.B. Hartmann and M. Koch, writing in 2006, Swiss insolvency legislation is based on the 1889 Federal Act on Debt Enforcement and Bankruptcy (Insolvency Act), as amended. This act is supplemented by other legislation relating to enforcement at the level of canton and commune and by laws specifically dealing with financial institutions, insurance companies, and other special cases. Regarding cross border insolvency, a litigation newsletter by the law firm of Schellenberg Wittmer noted that the Swiss Federal Supreme Court has held that foreign bankruptcy trustees must first initiate new proceedings in order to gain recognition of insolvency decrees awarded outside of the territory of Switzerland.

As explained by the Hartmann and Koch article, the Insolvency Act provides for either bankruptcy (liquidation) or composition (restructuring/rescue) proceedings in the case of insolvency. The responsibility for creating debt enforcement and bankruptcy offices, as well as for providing the first level or two of court supervision is relegated by law to the canton, with higher supervisory authority placed in the hands of the Federal Tribunal. According to Hartmann and Koch, while these arrangements may be adequate to handle small-business insolvency proceedings, a lack of canton-level staffing and expertise makes them less appropriate to deal with large-business or more complex cases. Whereas court-initiated restructuring procedures rarely result in business rescues, viable elements of troubled firms may survive through being taken over by another entity for an agreed-upon price, as adjudicated with the supervision of a commissioner and judge. Hartmann and Koch identify one problematic area in the Swiss insolvency regime as arising in the case where the insolvent firm is a part of a larger corporate group. According to the authors, "groups of companies are often managed as though they were a single legal entity, but in restructuring proceedings, each legal entity must be treated separately. Unless guarantees or legally binding letters of comfort are issued by parent or sister companies, creditors cannot usually hold the parent or sister company liable for debts incurred" (p. 2).

According to a 2003 IMF report, a proposal was submitted to parliament to amend the Swiss Banking Act that would considerably expand the supervisory authority over insolvency proceedings. It was expected to remove all administrative powers over bank reorganization and liquidations from the courts and place them with the Swiss Federal Banking Commission (SFBC), which at the time served as the bank supervisor and is now a part of the Swiss Financial Market Supervisory Authority (FINMA . Swiss law includes the moratorium as an insolvency option, which the 2003 IMF report has called "critical," because it allows the debtor firm to consider its options without pressure from creditors. This being the case, the IMF argues that the supervisory authority, as the participant best placed to recognize the need for such an option, should be empowered to either unilaterally impose a moratorium or at least to directly apply to the courts for it to be imposed. Under the proposed amendment to the Swiss Banking Act, the bank supervisory authority itself would have the power to impose such a moratorium. The 2003 IMF report adds that the amendment would also affect the current situation that obtains at the start of bankruptcy proceedings, when the holder of collateral security no longer able to realize its value at will, since the bankruptcy law precludes such action. Instead, assets belonging to the debtor, even if pledged as collateral, are considered a part of the debtor's estate, and are used to satisfy secured claims. Under the terms of the proposed amendment, financial collateral arrangements would be unaffected by insolvency measures.

The 2005 SFBC report states that the Bank and Securities Dealers Bankruptcy Ordinance of 2005 implemented the rules governing the compulsory liquidation of banks. The Bank Bankruptcy Ordinance lays out the steps to be taken in compulsory liquidation procedures for banks and securities dealers. This is the implementation of the bank insolvency legislation of 2004 that conferred on the SFBC the authority over bankruptcy for banks and securities dealers. The ordinance creates a simple, efficient, and transparent procedure for liquidations that is flexible enough to be adapted to various contexts. The ordinance emphasized the need to preserve bank-client privacy during the proceedings. Foreign and Swiss creditors are treated equally, and SFBC-appointed liquidators have broad discretion regarding the sale of assets. The report adds that the ordinance constitutes an important step toward the modernization of the Swiss bank insolvency law.

According to the "Doing Business 2009" snapshot offered by the International Bank for Reconstruction and Development and the World Bank, Switzerland ranks 38 out of the 181 economies surveyed for the factor measuring the effort it takes to close a business. The report tracks three aspects of the business-closing process to identify problem areas in insolvency regimes. These include the time it takes, on average, to complete the process, expressed in years; the average cost of the procedure, expressed as a percentage of the debtor estate; and the average recovery rate, expressed in cents on the dollar. The report also offers comparable figures for other member states in the region and for member states of the Organization for Economic Co-operation and Development (OECD). In Switzerland it takes an average of 3.0 years to complete a bankruptcy proceeding, and the average time required in OECD states is 1.7 years. It costs an average of 4 percent of the estate in Switzerland, compared to an OECD average of 8.4 percent. The average recovery rate is 46.8 cents on the dollar in Switzerland, compared to an average of 68.6 cents on the dollar in the OECD countries.