SPOTLIGHT #18: The Swiss AT1 Ruling – A Legal Victory, but the Path to Compensation Remains Complex
At Lead up, we are committed to providing our clients with the most innovative conflict resolution solutions tailored to their specific industry contexts. To achieve this, we stay abreast of the latest developments in our clients’ sectors and analyse these changes in relation to their needs.
Each month, in the “Lead up Spotlight,” we share with our colleagues, clients, and potential partners our analysis of a recent development related to conflict resolution in a sector that matters to us and our clients.
This month’s spotlight focuses on the recent decision by the Swiss Federal Administrative Court regarding the Credit Suisse AT1 bonds.
The Context: An Inverted Hierarchy
To appreciate the gravity of this decision, one must recall the frantic weekend of 19 March 2023. As Credit Suisse faced an acute crisis of confidence, the Swiss government orchestrated its emergency acquisition by UBS to prevent a systemic collapse.
At the heart of the controversy are the Additional Tier 1 (AT1) bonds. These are hybrid financial instruments designed to act as “shock absorbers”: if a bank’s capital levels drop below a certain threshold, these bonds are designed to be written down to save the bank.
In this instance, the Swiss regulator (FINMA) ordered the complete write-down of approximately CHF 16 billion in AT1 bonds to zero. FINMA justified this by claiming the government liquidity support constituted a “Viability Event”. However, this move shocked global markets because shareholders received compensation (in the form of UBS shares), while bondholders received nothing. This inverted the traditional insolvency hierarchy, where equity holders are supposed to absorb losses before debt holders.
Crucially, this write-down was not originally permitted under the standard law or the bond contracts (as the bank was still solvent). To overcome this hurdle, the Swiss Federal Council utilised its emergency powers, on a Sunday, to amend the “Liquidity Ordinance”, inserting a new Article 5a. This specific provision was the “legal key” that unlocked the write-down, retroactively empowering FINMA to zero out the bonds in connection with the liquidity assistance. It was, effectively, a change to the rules of the game enacted just hours before the deal was signed.
The Recent Swiss Decision: The Decree Was Illegal
In a decision that has reverberated through the global restructuring community, the Swiss Federal Administrative Court (FAC) recently delivered its judgment on this controversial write-down. The Court decided that that the regulator acted outside the law.
The FAC ruled that the FINMA decree of 19 March 2023 lacked a sufficient legal basis. The Court’s reasoning pivots on two critical legal findings:
- Liquidity is not Capital: The Court found that the contractual “Viability Event” was never triggered. At the time of the write-down, Credit Suisse met its regulatory capital requirements. The crisis was one of liquidity, not solvency. The Court rejected the argument that state liquidity support equated to the type of capital support that triggers a contractual write-down.
- Hierarchy of Norms: The Court held that the Emergency Ordinance issued by the Federal Council, which gave FINMA the power to order the write-down, was unconstitutional. It ruled that such a severe interference with property rights, particularly one that inverted the insolvency hierarchy by prioritising shareholders over subordinated creditors, required a formal legislative act passed by Parliament and could not be based merely on an executive emergency rule. Consequently, the Decree issued by FINMA based on this Ordinance was void of a valid legal basis.
The Strategic Horizon: Paths to Recovery
It is crucial to understand the procedural posture of this ruling. The Swiss Federal Administrative Court acts primarily as a court of review for administrative legality. While the FAC declared the write-down “unlawful” and formally revoked the decree, this victory creates a practical paradox.
The problem lies in the remedy. The Court did not order restitution, meaning it did not reinstate the bonds. Since Credit Suisse no longer exists as an independent entity, having been fully absorbed by UBS, reinstating the bonds could now a legal and practical impossibility. The bonds cannot simply be “turned back on”.
Consequently, the strategy for investors now shifts from challenging the administrative act to enforcing the right to compensation through different avenues. Here are three possibilities:
1. Negotiating with UBS: With the illegality of the write-down now confirmed by the courts, the leverage has shifted. UBS, as the legal successor to Credit Suisse, faces the prospect of prolonged uncertainty and reputational drag. A settlement may now be a viable option, as the bank may prefer to resolve outstanding claims to fully integrate the entity and close this chapter of the acquisition, rather than facing years of litigation based on an act now declared unlawful. It was reported last month that some investors already took that route.
2. Domestic Litigation against the State: Investors may pursue the Swiss Confederation directly in the domestic courts. Now that the act has been judged illegal, the foundation is laid for a State Liability claim.
- The Challenge: While the illegality is proven, claimants must still demonstrate causation. Specifically, they must prove that without the illegal decree, they would have recovered value. The State will likely argue that without the intervention, the bank would have failed, rendering the bonds worthless regardless.
- The Venue: These claims would proceed before the Federal Administrative Court or the Federal Supreme Court, depending on the procedural posture.
3. International Arbitration: For international investors, another option may lie outside the Swiss domestic system.
- The Mechanism: Investors from nations that have Bilateral Investment Treaties (BITs) with Switzerland may be able initiate Investor-State Dispute Settlement (ISDS) proceedings.
- The Advantage: An international tribunal provides a neutral forum, detached from Swiss political or budgetary concerns. Furthermore, the legal standard changes: even if the Swiss courts find that investors are precluded from asking damages, international law may still categorise the write-down as an expropriation without compensation.
Conclusion
The Swiss courts have signalled that the rule of law prevails over emergency financial engineering. The regulator’s decree was illegal. The question is no longer if the rights of bondholders were violated, but how that violation will be remedied. Whether through the boardroom with UBS, the courtrooms of Bern, or an international arbitral tribunal, the pursuit of quantum has now begun.
Disclaimer: This post discusses general legal developments and does not constitute Swiss or English legal advice. The situation regarding Credit Suisse AT1 litigation is evolving.