Enforcement of foreign winding-up orders
The bankrupt company: a truly international background
The debtor was an "international company" formed in 1994 under the laws of the British Virgin Islands and with its registered office in Tortola (the "company"). Its place of business was in London, from where the two beneficial owners conducted its business. The creditors are American investors who used the company for investment purposes. The company's main assets are located in Switzerland with a major Swiss bank in Zurich.
In its order dated 23 October 1996, the High Court of the British Virgin Islands ordered the compulsory winding-up of the company (the "winding-up order") and appointed a London liquidator to the company.
The combat against individual attachments orders
Before the winding-up order was issued in the BVI, all the company's assets in Switzerland, totalling some US$ 2 million, had already been attached at the request of individual investors who were claiming their investments back from the company. Some of the creditors who had obtained attachment orders had validated the attachment with simple payment orders under the Swiss Debt Collection and Bankruptcy Law ("DCBL"), and these payment orders were not objected to upon their receipt in the British Virgin Islands due to a lack of information provided to the company's registered officer. As a result of this, and upon application for continuation of the debt collection proceedings by some creditors, the attached assets were finally seized in March 1997 in favour of four creditors. In such cases, when a seizure occurs, the debt collection office issues a deed of seizure which must be served on the company as well as on the creditors in whose favour the seizure is made. Once this deed has been served and a certain time has elapsed, the assets can and must be realised in favour of the creditors who requested the seizure.
In a situation such as this, with a threatened realisation of the company's assets in favour of some of its creditors, the foreign trustee in bankruptcy has three methods available to him to prevent the assets from being distributed in favour of the individual creditors and, ultimately, of being lost to the estate. Which solution will best be employed depends on the time available and the circumstances of the individual case.
(1) Filing a Request for the Recognition of the Winding-up Order
Assets which have been attached by individual creditors and even seized in their favour but not realised and distributed at the time of the recognition of the foreign bankruptcy order form part of the Swiss bankruptcy estate. Were it possible, therefore, to obtain the recognition of the foreign winding-up order before the assets were realised, they could be maintained in favour of the foreign bankruptcy estate.
The request for recognition was filed on 10 February 1997, at the place where the assets were located, i.e. in Zurich. At the same time, a request was made, based on Article 168 of the Private International Law Act ("PIL"), which allows for provisional measures in the interim period until the judgment on the recognition of the foreign bankruptcy order is made. The court was requested to issue an order to the Debt Collection Office and to instruct it not to undertake any realisation or distribution of the assets attached to the creditors who had obtained the attachments. The Court denied this request. This denial is consistent with leading scholarly opinion, which maintains that such an order would deny justice to the creditors who have the right to continue with their debt collection proceedings. This means that only a favourable judgment on the recognition itself can stop the individual debt collection proceedings.
(2) Request for Restoration of Deadline
According to Article 33 (4) DCBL, anybody prevented by circumstances beyond their control from complying with a deadline may request the supervisory authority to restore the deadline. The petitioner must file the request for restoration within the same time limit as that which has elapsed, i.e., in the case of the restoration of a deadline for objection against a payment order, within 10 days of the circumstances preventing compliance with the deadline abating. The court has broad discretion on restoration; it is uncertain, however, whether in a situation where (assuming that the service was made in accordance with the procedural rules of the BVI) there has simply been a lack of proper instruction given to the company officer the request for restoration would succeed.
(3) File a Complaint
Where assets such as bank accounts are concerned for which it is not necessary for the creditor to file a request for realisation, the notification of the Deed of Seizure is the last communication from the Debt Collection Office to the debtor-company before the moneys are paid to the creditors who originally obtained the attachment. If it is not possible to obtain a timely judgment on the recognition of the winding-up order, the foreign liquidator can seek to file a complaint based Article 17 DCBL once he or she has been served with the Deed of Seizure. However, such a complaint can only succeed if the complainant can show that the order was based on an incorrect application of the law or on the inappropriate exercise of discretion, which criteria are quite difficult to meet. But even if the chances of success are limited, a complaint can be decisive in situations where there is a close "race" between proceedings brought by individual creditors and the trustee's attempt to maintain the assets in favour of all creditors, provided the request to stay the individual debt collection proceedings (which can be filed along with the complaint) is granted in accordance with Article 36 DCBL.
Where should the foreign proceedings for winding-up be initiated?
It is possible in some jurisdictions outside Switzerland to initiate bankruptcy proceedings at the business location of a company as opposed to at the place where the company has its registered seat. In this case, it would have been possible to initiate the compulsory winding-up in England instead of in the BVI. This was not considered appropriate, but only because of the ad valorem fees of the DTI, and not because of the recognition proceedings in Switzerland.
According to the Swiss rules for recognition of a foreign bankruptcy, the winding-up order must have been rendered in the state of the debtor's domicile (Article 166 PIL) in order to be recognised. According to Article 21 PIL, the registered office of a company is equivalent to its domicile, and is deemed to be located at the place designated in the by-laws or in the articles of association. Only where there is no registered seat does the place where the company is, in fact, managed become relevant.
In an earlier case concerning the recognition of a foreign winding-up order, the Bankruptcy Judge of the District Court of Zurich ruled, in a decision dated 20 April 1993, that it was possible to recognise a foreign winding-up order in Switzerland if it was rendered at the place where the company had its "effective" seat as opposed to its registered seat. But in light of a decision rendered by the Federal Supreme Court on 17 December 1991 (BGE 117 II 494) clearly denying the concept of a fictitious seat under PIL, it would normally be advisable to obtain a winding-up order in the state where the company is incorporated, rather than in the state where the company has its place of business.
Practical issues regarding the requirements for recognition
According to Article 166 PIL, a number of different requirements must be met for the recognition of a foreign bankruptcy decree. The following highlights certain issues which caused specific problems in the reported case.
(1) Qualification as "Bankruptcy Decree"
In its submissions of 22 March 1996 and 24 July 1996, the company applied to the High Court of Justice in the Virgin Islands requesting to be wound up on account of insolvency on the basis of Article 115 (d) of the Companies Act of the BVI or, alternatively, Article 115 (e) of the said provisions, whereby a company can also be dissolved if, in the court's view, this is reasonable and equitable. In its order of 23 October 1996, and in separately published arguments, the court left open the question of the company's insolvency and, on the basis of the latter provision, ordered the compulsory winding-up.
Article 166 of PIL requires that the foreign decision amount to an order in bankruptcy. In the legal textbooks, such a bankruptcy order qualifies as an order initiating an authoritative procedure in which the assets of an insolvent or recalcitrant debtor are divided equally amongst all creditors. Since Swiss bankruptcy procedure does not recognise reasons for filing a bankruptcy procedure other than in cases of an insolvent or recalcitrant debtor, it was not clear whether Article 166 PIL had to be construed narrowly and be limited to foreign proceedings filed for these reasons, or whether the basis of the winding-up order dated 23 October 1996 should be accepted as an order in bankruptcy under PIL.
In his decision of 11 June 1997 (the "decision"), the Bankruptcy Judge held that - subject to public policy - it was not necessary for the winding-up to be based on the debtor's insolvency, if it was a compulsory winding-up ordered by a foreign authority. The Judge, however, required that the order have the typical consequences of Swiss bankruptcy, i.e. restricting the common debtor's power to dispose of its assets, with subsequent general winding-up (liquidation) of such assets in equal favour of all creditors and in accordance with their respective claims.
(2) The Enforceability of the Winding-up Order
Article 166(1)a of PIL provides that the bankruptcy decree must be enforceable in order to be recognised in Switzerland.
It is a matter of dispute whether enforceability in the sense of this Article means the same as "finality" in Article 29(1)a of PIL, which sets out the requirements for the recognition of foreign judgments in general. Enforceability means that the judgment can be recognised independently of whether or not it is still possible to file an appeal against it in the state where it was rendered, provided that the judgment is enforceable in this state. Finality, on the other hand, presupposes that no further right of appeal is possible and that the judgment can therefore no longer be overturned or amended on appeal in the state where it was rendered.
In its interim order dated 21 March 1997, the Bankruptcy Judge held that the winding-up order must be final in the sense of Article 29 of PIL. The reasoning was that one should avoid initiating a "mini-bankruptcy" in Switzerland before it has been established that the foreign bankruptcy decree can no longer be overturned in the state where it was rendered, since this would mean that time consuming and costly bankruptcy proceedings in Switzerland would have to be rescinded.
In the present case, there was no danger that the assets would be dissipated, since they were all attached. In other situations, however, the Judge's opinion in the 21 March 1997 decision could have the effect that, in provisional stages, such as where a "provisional sequestration order" is issued, the assets in Switzerland could fail to be protected. In an earlier case, concerning a provisional sequestration order issued in South Africa, a different judge in the District Court of Zurich held that the fact that PIL provided for provisional measures only after a full-fledged foreign bankruptcy decree had been issued constituted a gap in the law. The judge in that case granted broad provisional measures regarding the assets located in Switzerland (see the July 1993 edition of International Litigation News, page 23). If the view that provisional measures can be granted before the winding-up order has become final is generally accepted by the bankruptcy courts throughout Switzerland (with the result that provisional measures are granted before the bankruptcy has become final), then the opinion in the decision of 21 March 1997 that the decree has to be final for its recognition can be approved.
With regard to evidence of the finality, the trustee in bankruptcy in the 10 February 1997 submission produced the relevant rule of the BVI law and an affidavit from a lawyer practising in the BVI, according to which the winding-up order of 23 October 1996 was effective and final. The Judge, however, refused in his interim order, dated 21 March 1997, to accept this as sufficient evidence since he considered the affidavit to be "a simple assertion by a party", and requested that the trustee file a confirmation of finality from the court in accordance with Article 29(1)b of PIL.
In the present case, the trustee in bankruptcy succeeded in receiving an appropriate confirmation of finality from the High Court of Justice of the British Virgin Islands; this ruling did not, therefore, jeopardise the recognition of the winding-up order. But it should be noted that, in a decision taken on 25 February 1997, the Cassation Court of the Canton of Zurich held that it was possible under Article 29(1)b of PIL to submit to the Swiss court other evidence of the finality of the decision to be recognised apart from a confirmation by the issuing court. This decision must be approved, since it is not always possible to obtain such a declaration of finality in other jurisdictions, and it would be unsatisfactory if this were to preclude the recognition of court judgments and also of bankruptcy orders.
(3) Reciprocity
Under Article 166 of PIL, the foreign trustee must prove that the state in which the winding-up order was issued recognises Swiss bankruptcies in similar circumstances. If there are precedents in the Swiss courts with regard to recognition by certain states of bankruptcy orders rendered in Switzerland, or studies in Swiss textbooks on the attitude of that state towards reciprocity, the proof of reciprocity can be made by reference to them. With regard to the BVI, however, this was not the case.
In his first submission on 10 February 1997, the trustee essentially argued (on the basis of an affidavit from a lawyer practising in the BVI with supporting documentary evidence) that, with regard to the question of recognising foreign bankruptcies, Virgin Island law corresponds to English law, which in principle recognises foreign bankruptcies. However, on the basis of the documents produced, the court refused to accept as proven the rule that the courts in the Virgin Islands would grant reciprocity to Swiss bankruptcy decrees, and in an order dated 21 March 1997, the trustee was therefore in accordance with Article 16(1) of PIL (that the contents of any foreign law shall be established by the Swiss court on its own motion, unless the case concerns matters involving an economic interest when the task of establishing foreign law may be assigned to the parties) given time to demonstrate reciprocal rights to the court pursuant to Article 166(1)c of PIL. In this second submission, based on this order and filed on 29 May 1997, the trustee produced an opinion from the Swiss Institute of Comparative Law elaborating on the reciprocity of the BVI law, which was accepted by the court in its affirmative decision on the recognition dated 11 June 1997.
And after the Recognition of the Foreign Bankruptcy Decree?
The recognition of the winding-up order leads to the initiation of a "mini-bankruptcy" in Switzerland with regard to the Swiss assets of a bankrupt company. After publication of the recognition of the bankruptcy, the Bankruptcy Office requested Swiss-domiciled creditors secured by collateral and privileged creditors (according to Swiss bankruptcy law) to file their claims. These creditors are included in the Swiss schedule of debts and are allowed to receive the assets located in Switzerland. Only a remaining balance can be transferred to the trustee.
Unsecured and unprivileged Swiss-domiciled creditors, as well as foreign creditors, are not included in the Swiss schedule of debts and cannot participate in any distribution of assets in Switzerland. All Swiss-domiciled creditors, however, have the right to be heard in the necessary procedure for recognition of the foreign recognition of debts.
In the present case, the Swiss schedule of debts was published on 24 September 1997, and became final 20 days later. No Swiss creditors were included in the schedule of debts. Assets in the accounts in Switzerland will be remitted to the foreign trustee only if the Swiss bankruptcy judge recognises the foreign schedule of debts (Article 173 of PIL). In this procedure, the court reviews, specifically, whether all the creditors domiciled in Switzerland have been fairly included in the foreign schedule of debts. This can raise additional problems when the foreign procedure for winding-up does not recognise one document as a complete and final schedule of debts representing all the creditors. This is the situation in this case, and it will be necessary to provide the Swiss court again with the (translated) foreign provisions, and probably with a new opinion from the Swiss Institute of Comparative Law, to show that finality has been reached in this regard in the BVI winding-up procedure.
Summary of practical issues
- If individual Debt Collection Proceedings are initiated, the trustee in a foreign bankruptcy must ensure that these are stopped by objecting to payment orders served on the company.
- The trustee in foreign bankruptcies should - as a first step - conduct research with regard to whether or not the state which rendered the bankruptcy order would grant reciprocity to bankruptcy decrees from Swiss courts in similar cases, since Swiss law requires this.
- If the country which orders the winding-up does not grant reciprocity (as this appears to be the case in some northern countries, such as Finland), the trustee can still seek to co-operate with a "friendly" creditor.
- The trustee in foreign bankruptcies can seek provisional measures to safeguard the funds in Switzerland even if his or her appointment is not final.
- It is helpful to know how many creditors domiciled in Switzerland have claims secured by collateral or are privileged under Swiss law, since these creditors would receive upfront any assets located in Switzerland. Depending on the extent of the assets in Switzerland, it might not in fact be a worthwhile exercise for the foreign trustee in bankruptcy to initiate a recognition procedure in Switzerland.
- Based on our experience in Zurich, from the time the court is satisfied that it has all the necessary documents and evidence and once the advance for costs are paid, it takes about two weeks for the court to decide on the recognition of the winding-up order. However, the gathering of the necessary affidavits (especially for the proof of enforceability), translations, and - if there are no precedents in Switzerland concerning reciprocity - a legal opinion from the Institute of Comparative Law, can take quite a long time. This must be borne in mind when individual debt collection proceedings are to be stopped by the recognition.
- Swiss courts regularly request the payment of advances for costs for the bankruptcy proceedings and for their own costs for the recognition proceedings. This must especially be kept in mind when all the assets of a bankruptcy estate are located in Switzerland, and are not accessible until the recognition is granted and the Swiss mini-bankruptcy is terminated. Making this funding available beforehand will reduce the time it takes for a Swiss judgment on the recognition.
- In the above reported decision, the Bankruptcy Judge recognised a winding-up decree which was ordered by the foreign court on the basis of provisions, whereby a company can be dissolved if this is "just and equitable". Since the decision was rendered by a lower Swiss court, and since there is a lack of precedent or legal opinion on this issue, it would seem advisable in cases where there are different possible reasons for initiating a compulsory winding-up petition, to file a petition for winding-up in the foreign state which is based on insolvency. (This would at least save part of the considerable costs of translating legal provisions, and of obtaining a legal opinion and additional orders in the state which rendered the winding-up order, all of necessary in this case to prove the similarity of effects).
Nathalie Voser - Schellenberg & Haissly, Zurich
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
