The gist of a recent revision of the Banking Law and the enactment of the corresponding ordinance, which entered into force on August 1 2005, was to widen the competence of the Federal Banking Commission to include insolvency procedures affecting banks and securities dealers. The Commission is now solely competent for procedures including bankruptcy and reorganizations.
In addition, the revised law provides for satisfaction of smaller creditors up to SFr5,000 ($3,925) prior to all other creditors and a privilege for deposits of up to SFr30,000. The privileged deposits are also secured by a mandatory protection scheme.
Close out and netting provisions
Article 27, paragraph three of the Federal Banking Law states that close out and netting provisions remain enforceable in case of protective measures ordered by the Federal Banking Commission such as moratorium, maturity postponement, closure of bank and payment prohibition. Thus the provisions make it clear that protective measures imposed by the Federal Banking Commission do not affect close out and netting provisions. Article 211 paragraph two of the Swiss Bankruptcy Act already provided that close out and netting provisions are enforceable in case of bankruptcy. However, there remained some degree of uncertainty as to whether close out and netting provisions were enforceable in a payment prohibition or a maturity postponement.
Private liquidation of collateral
Article 27 paragraph three of the Federal Banking Law further stipulates that an agreement for a private liquidation of collateral posted by a Swiss bank or securities dealer consisting of securities and other financial instruments, traded on a representative market (hereinafter "Eligible Collateral"), continues to be effective and will not be affected despite protective measures ordered by the Federal Banking Commission.
According to the Swiss Bankruptcy Act, the general rule in insolvency is that the administrator is in charge of the liquidation of collateral (while preserving the secured party's right to receive the proceeds). Collateral must be submitted to the insolvency administrator. This also applies where the pledge agreement provides for a private liquidation of the collateral.
Although the wording of article 27 paragraph three of the Federal Banking Law appears to cover only pre-insolvency protective measures, the prevailing view is that it must be applied broadly to also cover insolvency.
This view is supported by article 16 of the Ordinance on Bank Insolvency. It stipulates that collateral consisting of securities and other financial instruments must not be submitted to the insolvency administrator, provided the legal requirements for a private liquidation of the collateral by the secured party are met. The requirements for private liquidation are twofold. Firstly, there must be an agreement specifying the right to liquidate the collateral privately and secondly, the collateral must have a market value.
The secured party must nevertheless notify the insolvency liquidator of the collateral and demonstrate its right to private liquidation. The secured party has to render an accounting of the liquidation and remit any surplus to the estate in insolvency.
Despite the narrow wording of article 27 paragraph three of the Federal Banking Law, we are of the view that the agreement for private liquidation of Eligible Collateral survives the insolvency of a Swiss bank or securities dealer. This view has been confirmed informally by the Federal Banking Commission. Since almost inevitably protective measures will precede the bankruptcy of a bank or securities dealer, the question as to whether the right to privately liquidate collateral will survive bankruptcy may be an academic one.