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Go for broke! Arbitration and insolvency in Switzerland (Chapter 3)

As we discussed in our previous contributions, arbitration can be an interesting dispute resolution mechanism in the context of insolvency proceedings, in particular given the facilitated enforcement of international awards. That said, insolvency proceedings often involve mandatory provisions and the active participation of state courts and public authorities. The state will therefore not necessarily allow all aspects of insolvency proceedings to be settled by arbitration but, on the contrary, reserve a considerable part of the process to the exclusive jurisdiction of state courts.

The admissibility of arbitration in insolvency proceedings is a matter of arbitrability. Under Swiss law, arbitrability pertains to the substantive validity of the arbitration agreement and, hence, to the jurisdiction of the arbitral tribunal. Put differently, if a matter is not capable of being settled by arbitration, then the arbitration agreement is invalid and the tribunal has no jurisdiction to rule over the dispute. Should the tribunal wrongly uphold jurisdiction despite the matter being inarbitrable, then the award is likely to be set aside by the Swiss Supreme Court.

Article 177(1) of the Swiss Private International Law Act (PILA) provides that any dispute involving an economic interest (cause de nature patrimoniale) is arbitrable. In other words, if the claim at issue has a financial value, then the matter is arbitrable. Therefore, in Swiss-seated international arbitrations, it does not matter whether:

  • Swiss domestic law provides for the exclusive jurisdiction of state court.
  • The law of the state where the insolvency proceedings take place (the lex concursus) imposes restrictions on arbitrability.
  • Other foreign mandatory rules (for example, mandatory provisions of the state where some of the bankruptcy estate’s assets are located) require that certain disputes be brought before a state court.

While the substantive rule of private international law set out in Article 177(1) of PILA dispenses with any complex analysis of the law applicable to the issue of arbitrability, it might lead to difficulties at the enforcement stage. In particular, disregarding the potential (mandatory) restrictions on arbitrability of the lex concursus or of the states where the award will likely be enforced could prevent the award from being enforced.

As to whether a matter involves an “economic interest” within the meaning of Article 177(1) of PILA, it is necessary to examine whether the matter at stake can be quantified in monetary terms, it being specified that this notion is to be understood broadly. That being said, the Swiss Supreme Court considers that matters whose judicial handling is exclusively entrusted to state courts pursuant to provisions that are mandatory as a matter of public policy are not arbitrable.

Accordingly, in the specific context of insolvency proceedings, a distinction must be made between “substantive” legal actions and actions related to “pure” bankruptcy matters (the identification, collection and distribution of the estate’s assets, and so on).

While the arbitrability of claims filed in the context of insolvency proceedings is not clearly settled under Swiss law, the situation can in our view be summarised as follows:

  • “Pure” bankruptcy issues. Such actions would for instance encompass applications to lift an objection to a payment order, as per Articles 80 to 84 of the Swiss Debt Enforcement and Bankruptcy Act (DEBA), judgments declaring a company bankrupt (Articles 171 to 176, DEBA), the nomination of a trustee to the bankruptcy estate (Article 237(2), DEBA) or the identification, collection and distribution of the estate’s assets (Article 240, DEBA). The prevailing view in Switzerland is that matters of “pure” bankruptcy law are not arbitrable.
  • Substantive issues. These claims typically concern the recognition or denial of the existence of a debt. Under Swiss law, this would respectively correspond to the legal actions set out in Articles 79 and 83 of DEBA. Legal actions to validate a freezing order (Article 289, DEBA) can also be regarded as dealing with substantive issues. The prevailing view is that all of these matters involve an “economic interest” as per Article 177(1) of PILA and are therefore arbitrable.
  • Issues of a mixed nature. Such actions, which combine elements of both bankruptcy and private law, involve, for example, the challenge by a creditor (or a third-party creditor) in relation to the schedule of claims (Article 250, DEBA), actions to include assets in the bankruptcy estate or to exclude them therefrom (Article 242, DEBA), or actions to challenge fraudulent transactions or undue preferences (Article 289, DEBA). The arbitrability of such “mixed” legal actions is highly controversial.

In conclusion, although a number of issues remain undecided in relation to the arbitrability of insolvency proceedings, the uneasy relationship between arbitration and insolvency law becomes particularly evident in an international context. Although Swiss law adopts a relatively straightforward approach when it comes to arbitrability, the simplicity of this solution can prove unsatisfactory if there are tensions between Swiss international arbitration law and foreign insolvency law (assuming that foreign law adopts a restrictive approach when it comes to the arbitrability of insolvency issues). For instance, a Swiss-seated tribunal might have to assume jurisdiction to rule over a dispute relating to insolvency law, even though there is no reasonable prospect that the award will be enforced abroad.

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