As much as the world was sighing with relief when the Swiss Financial Market Supervisory Authority (FINMA) approved the sale of Credit Suisse to its rival, Swiss bank UBS, on 19th
others were taking out their knives: holders of Credit Suisse’s additional tier (AT1) bonds are faced with a write-down to zero, while shareholders receive only some compensation.
While FINMA defended its decision, saying it was “legally watertight,”2
reports saying that affected bondholders were to sue the Swiss government emerged fairly quickly. Some of the companies holding the bonds have already declared their public discontent3
Such criticism, whilst polemic, is somewhat understandable. Aside from the drastic action taken, it was only on 15th
March 2023, a few days before the Credit Suisse takeover took place, that FINMA and the SNB issued a “statement on market uncertainty.” In the first paragraph of this statement, FINMA and the SNB pointed out “there are no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market
While it remains to be seen what avenues are available for such actions, it is well known that investors have been increasingly turning to investor-state dispute settlement (ISDS) mechanisms to resolve disputes arising from or in respect of a host state’s regulator or regulations. This is of particular interest in Asia where, according to reports, many AT1 bonds were sold to retail investors.5
This raises the question whether ISDS is an option for Malaysian investors, and more broadly, what avenues exist. With the little information available to date, this short article provides only an overview.
Civil actions before Swiss courts
Malaysian holders of the – now worthless – bonds could in principle pursue claims before Swiss courts. According to the principle of state liability (in German: Staatshaftung
), organs of the state or public authorities can be liable for their actions. Article 146 of the Swiss Federal Constitution (Bundesverfassung
) sets forth that Switzerland is liable for damages which its organs caused in exercising their functions, when acting against the law. The Federal Law on the Liability of the Confederation among others sets forth the government’s liability relating to property.6
While it is too early to provide for an assessment of this legal avenue, there is no doubt that FINMA and the SNB were given the authority to act through an Emergency Ordinance by the Swiss Federal Council (Notverordnung des Bundesrats
). The Swiss Federal Council is the supreme governing and executive authority of the Swiss federal government.7
Constitutional challenge before Swiss courts?
The move by the Swiss government could be considered unconstitutional. There
is no special court for constitutional matters in Switzerland. The Federal Supreme Court of Switzerland (Schweizerisches Bundesgericht
) is the last instance in all such matters.8
The Federal Supreme Court of Switzerland is not entitled to repeal, invalidate or refuse to apply any law as it is bound by Swiss laws by virtue of Article 190 of the Swiss Federal Constitution.
The Federal Supreme Court may, and occasionally does, criticise unconstitutional federal laws in a statement of reasons for a judgment. Such criticism occasionally leads to legislative amendments by the Federal Assembly. However, given what is at stake in this matter for the Swiss government and Switzerland as a whole, it is highly unlikely that such criticism will lead to any amendments in law.
Investor state claims
Malaysia and Switzerland are parties to a bilateral investment treaty (Agreement between the Government of the Swiss Confederation and the Government of Malaysia concerning the promotion and reciprocal protection of investments
) which dates from 1978 (the “BIT”). According to Article 5 of the BIT, measures of expropriation, nationalisation or dispossession, both direct and indirect, are only possible when taken in the public interest, on a non-discriminatory basis and under due process of law. There must also be effective compensation, which shall have been fixed at the time of expropriation. The BIT also contains a fair and equitable treatment (FET) clause in its Article 3(2), thus giving potential Malaysian claimants further avenues.
However, if the transaction is governed by the Malaysian laws, the BIT as an international treaty could only be incorporated as local laws by an Act of Parliament9
. The present authors have been unable to locate any such Act of Parliament. It therefore remains unclear whether Malaysian claimants can avail themselves of this avenue vis-à-vis the relevant foreign authorities or entities.
It is clear that there was no effective compensation for AT1 bondholders, as the value of their bonds was zeroed. This puts into serious doubt the decision by the Swiss regulators. FINMA, at its end, claimed that it relied not only on the Emergency Ordinance, but also on the issuance prospectuses for the AT1 bonds. According to FINMA, the AT1 instruments issued contractually provided that they will be completely written down in a “Viability Event
”, in particular if extraordinary government support is granted. FINMA saw this condition as being met.10
Previous additional tier 1 bonds actions
Disputes surrounding additional tier 1 bonds have led to legal disputes before. India’s Yes Bank wrote off approximately US$ 1 billion in AT1s in March 2020 after the Reserve Bank of India initiated a restructuring. Ensuing court proceedings are still ongoing. On 4th
March, the Supreme Court of India extended the stay granted on the Bombay High Court's order that quashed Reserve Bank of India's (RBI) and Yes Bank's decision to write off.11
In 2017, the AT1 bondholders of Spain's Banco Popular lost their investment when the bank was taken over by Santander for one Euro. This deal had come amid pressure from the European Central Bank, which had feared that Banco Popular was failing or likely to fail. In this case, both bondholders and shareholders were losing out.12
The move by FINMA and the SNB was drastic. In case of a restructuring, shareholders are the ones who primarily suffer losses, with creditors (such as bondholders) only coming thereafter. It is noteworthy that while Switzerland is not part of the EU and FINMA and the SNB act fully independently from the European Central Bank (ECB), the latter was quick to issue a statement which among others highlighted that “common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down. This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions
It is premature to assess at this point whether Malaysian (retail) investors should take any action and if so, what the best avenue is. While FINMA claimed that it relied on the issuance prospectuses and gave an according explanation, it remains to be seen whether the information FINMA alluded to is contained in every prospectus and whether contradictory information exists. No doubt, this would be highly debated during any dispute resolution process.
As a first step, investors should therefore seek legal advice depending on their situation so that they can fully appreciate the situation they find themselves in and make a proper assessment of available options.
For further information on this topic please contact Mubashir Bin Mansor, Skrine’s Dispute resolution partner (General Litigation) including international arbitration, and head of Skrine’s aviation practice, Dr. Harald Sippel, Head of Skrine’s European Desk or Vishnu Vijandran, Associate, by telephone (+603 2081 3999) or email (firstname.lastname@example.org, email@example.com