The Powers Of The Foreign Bankrupt Company And The Foreign Bankruptcy Administrator To Act Before The Swiss Authorities In Case Of Fraud -…

When a foreign company is defrauded and goes bankrupt, severalconnections with Switzerland may exist. If the company has been thevictim of criminal acts committed by its corporate organs, it ispossible that these organs have used accounts in Switzerland todivert funds or to launder them. It is also possible that thecompany itself has assets in Swiss accounts that will have to berecovered in the foreign bankruptcy proceedings.

In cross-border fraud context, several proceedings may thereforebe necessary in Switzerland, not only to establish the liability oflegal entities and individuals, but above all to recover funds toreduce the damage caused. This will involve, for example, civil andcriminal proceedings against Swiss banks and their employees whoparticipated in the fraud or in the laundering of its proceeds.

In principle, the recognition of foreign bankruptcy decisionsleads to the initiation of auxiliary bankruptcy proceedings toliquidate the bankrupt's assets located in Switzerland by alocal administrator (the Swiss "ancillary bankruptcy" ormini-bankruptcy). However, since 2019, at the request of theforeign bankruptcy administrator and in the absence of Swisspreferred creditors, the Swiss competent court can waive theancillary bankruptcy proceedings, and authorize the foreignbankruptcy administrator to directly bring proceedings inSwitzerland.

Knowing the standing of the parties potentially involved(foreign bankrupt company, foreign bankruptcy administrator,ancillary bankruptcy administrator) is particularly important, asSwiss criminal law restricts the actions of the foreign bankruptcyadministration in Switzerland. Indeed, under Article 271 para. 1 ofthe Swiss Penal Code (PC) it is a crime for agentsof a foreign State to carry out acts on Swiss territory which underSwiss law are the prerogatives of Swiss authorities. Acts offoreign administrators in Switzerland may therefore constitute acriminal offense under Article 271 PC.

I. Action against a debtor in the civil courts

When a foreign bankruptcy administrator intends to act inSwitzerland against a debtor to recover assets located inSwitzerland, the question arises as to which of the bankruptcompany, the foreign bankruptcy administrator or the ancillarybankruptcy administrator can take action before the civil courts.This problem must be solved notably when the bankrupt company wantsto act against a Swiss bank for its potential liability in thefraud or the laundering of its proceeds.

First, it should be noted that the principle of territorialityapplies in Swiss bankruptcy law. Accordingly, foreign bankruptcydecisions have generally no direct effect on Swiss territory.

Whether the foreign bankruptcy administrator can act and seizeassets on behalf of the foreign bankruptcy estate in Switzerland isthen determined according to Swiss private international law, i.e.the Federal Private International Law Act(PILA).

Prior to recognition, the foreign bankruptcy administrator wouldonly be entitled to request recognition of the foreign bankruptcydecision and protective measures. In this context, case law isclear that the foreign bankruptcy administrator is not entitled tobring an action against a Swiss debtor or to file a claim in thebankruptcy of a Swiss debtor. The reason is that the acts mentionedwould circumvent the system designed by the PILA, which aimsnotably to give preference to creditors domiciled inSwitzerland.

However, even when the foreign bankruptcy decision is recognizedin Switzerland, the PILA and the case law of the Swiss FederalSupreme Court also strongly limit the scope of action of theforeign bankruptcy administrator in Switzerland. We can mention thefollowing hypotheses of actions:

According to the Swiss Federal Supreme Court, if the foreignbankruptcy administrator were granted the same powers as theancillary bankruptcy administrator, in particular the power tobring an action directly against a Swiss debtor, the admission ofthe action would have the effect of taking assets away from theSwiss creditors admitted to schedule of claims of the ancillarybankruptcy, which would be contrary to the purpose of the systemestablished by the PILA.

Therefore, when assets are in Switzerland and the foreignbankruptcy decision has been recognized, the enforcement of a claimcan take place through the following channels:

Thus, Swiss law takes a restrictive approach to the powers ofaction that a foreign bankrupt administrator may bring to recoverassets located in Switzerland through civil proceedings when theforeign company was victim of a fraud. It cannot itself actdirectly in Switzerland against its debtor, since this competenceis in principle exercised by the ancillary bankruptcyadministrator. The foreign bankruptcy administrator is drasticallylimited in its powers of action when it follows the classic path ofPILA (recognition of the foreign decision and subsequent opening ofancillary bankruptcy proceedings). The foreign administrator has,however, more proactive options, such as to request the assignmentof the claim or the waiver of the ancillary bankruptcy, which givethe foreign bankruptcy administrator more room for maneuver andcontrol.

II. Participation of the foreign bankrupt company in criminalproceedings

In addition to civil proceedings, the defrauded company willhave an interest in participating in criminal proceedings inSwitzerland against third parties who were part of the fraud or thelaundering of its proceeds. For example, when criminal proceedingsare initiated against a bank employee who took part in the fraud,it will be important for the company to access all the documentsgathered by the Public Prosecutor to obtain evidence in support ofactions for damages or other actions.

In Switzerland, the status of party to criminal proceedingsgives access to various rights, including the right to be heardprovided for in Article 107 of the Swiss Code of Penal Procedure(CPP), which includes notably the right to inspect the documentsrelating to the criminal proceedings, to take part in proceduralacts and to submit requests for further evidence to be taken.

According to Article 104 para. 1 CPP, the plaintiff isconsidered a party to the criminal proceedings and therefore hasthese procedural rights.

The question of whether the foreign bankrupt company can beconsidered a plaintiff must be examined in the light of severalprovisions of the Swiss Code of Penal Procedure.

According to Article 118 para. 1 CPP, a plaintiff is a personsuffering harm who expressly declares that they wish to participatein the criminal proceedings as a criminal or civil claimant.Indeed, in the criminal proceedings, the person suffering harm caneither request the prosecution and punishment of the personresponsible for the offense (criminal complaint) or requestcompensation for his damage (civil claim), or both (art. 119 al. 1CPP).

The concept of "person suffering harm" is thereforeessential in criminal law since it is a condition to be aplaintiff.

Article 115 para. 1 CPP defines the person suffering harm as aperson whose rights have been directly violated by the offense.Therefore, the person who wants to be a plaintiff must prove thatthe damage suffered is plausible and that there is a link betweenthe damage and the offense. When a property-related offense iscommitted against a company, only the latter suffers damage and canclaim to be the injured party. This is not the case for itsshareholders or beneficial owners.

Therefore, when the company goes bankrupt, it may be grantedplaintiff's status if it can prove that its rights have beendirectly violated by the offense under investigation.

In a decision rendered in 2017, the Geneva Court of Justiceexamined the capacity to appeal of a bankrupt Lithuanian bank whosestatus as plaintiff was disputed.

First of all, the offenses denounced by the foreign bankruptcompany - unfair management and money laundering - could be invokedby it, since it had been directly injured by those allegedacts.

In the case at hand, the bankruptcy administrator of theLithuanian company had obtained in Switzerland the recognition ofthe Lithuanian bankruptcy decision and the opening of an ancillarybankruptcy, administered by the Swiss Financial Market SupervisoryAuthority. The latter had assigned, according to article 260 DEBA,to the foreign bankruptcy administrator, the rights that the estateof the ancillary bankruptcy had renounced to enforce.

According to the Court of Justice, despite the assignment, theforeign bankrupt company was still a "person sufferingharm" within the meaning of Article 115 CPP and a plaintiffaccording to Article 118 CPP. It therefore remained a party to theproceedings and had a right to support the prosecution and toappeal against the order to abandon the proceedings issued by thePublic Prosecutor.

Swiss law therefore adopts a more flexible approach in criminalproceedings than in civil proceedings, as it directly allows thedefrauded foreign company to be a plaintiff against the third partywho committed the offense.

The foreign company that goes bankrupt can therefore act on itsown without the need to obtain the approval or the assignment ofrights by the ancillary bankruptcy. In this way, it acquiresprocedural rights that could prove advantageous, particularly whenthere are parallel proceedings in Switzerland that require theprovision of evidence.

It should be pointed out that - even if the foreign bankruptcompany is a plaintiff in the criminal proceedings - the ability toobtain civil compensation for the damage caused by the offense(whether before the criminal court or in a separate civil action)remains with the ancillary bankruptcy administrator or the foreignbankruptcy administrator in case of assignment or waiver of theancillary bankruptcy.

In conclusion, the bankruptcy of a foreign company with links toSwitzerland is likely to trigger numerous administrative, civil orcriminal proceedings.

Swiss law offers several legal avenues to obtain compensation incase of fraud.

The powers of the parties entitled to intervene in theseproceedings - in particular the foreign company or the foreignbankruptcy administrator - will depend on the type of proceedingsand the specific circumstances of each situation. Coordinationbetween the various proceedings and the many actors involved, aswell as the establishment of a recovery strategy, is thereforecrucial to increase the chances of recovering assets.

A different version of this article had already beenpublished in FIRE Magazine.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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The Powers Of The Foreign Bankrupt Company And The Foreign Bankruptcy Administrator To Act Before The Swiss Authorities In Case Of Fraud -...