Recent legal developments mean that those bondholders who were left out of pocket under terms of the UBS emergency takeover of Credit Suisse in 2023 may have a chance of recompense. But the road to this may be challenging. The author considers the issues.

There have been several recent legal developments which have significantly affected the options available for Credit Suisse AT1 bondholders who lost out following the write-down by the Swiss Government in 2023. This debt is a hybrid, perpetual bond issued by banks to meet regulatory capital requirements after the 2008 financial crisis. It acts as a "bail-in" tool, as it can be converted into equity or written down to absorb losses if a bank's capital levels fall below a certain threshold.

In October, the Swiss Federal Administrative Court ruled that the decision to wipe out the bonds was unlawful, while the option of suing Switzerland in the US was struck down by the Manhattan Court, ruling that Switzerland acted as an immune foreign sovereign in the sale of Credit Suisse.

In this article, Shaun Leong (pictured below), partner and international arbitration specialist at law firm HFW, considers the legal case. The editors are pleased to share these insights and invite responses. The customary editorial disclaimers apply to views of guest writers. Jump into the conversation and email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com.    

Shaun Leong   

The 2023 write-down of Credit Suisse’s Additional Tier 1 (AT1) bonds by the Swiss government had a significant impact on global financial markets, leaving thousands of investors facing substantial losses. Since then, bondholders have sought avenues to reclaim their investments, with legal battles occurring across multiple jurisdictions. Recent developments have brought both opportunities and new challenges, making it crucial for affected investors to understand the current landscape and the viability of each legal route.

In a significant turn, the Swiss Federal Administrative Court recently ruled that the decision to wipe out Credit Suisse’s AT1 bonds lacked a legal basis. While this ruling was a moral victory for bondholders, it stopped short of awarding financial compensation or reversing the write-down. The counterparty in these proceedings, FINMA (the Swiss financial regulator), is not designed to compensate investor losses, and the practical implications of the ruling remain uncertain as FINMA has appealed the decision.

Meanwhile, attempts to sue Switzerland in the US have been struck down. The Manhattan Court ruled that Switzerland acted as an immune foreign sovereign in the sale of Credit Suisse, effectively ending the possibility of pursuing claims against the Swiss state in US courts. This outcome underscores the complexities of cross-border litigation and the limitations of national legal systems in addressing global investor grievances.

Against this backdrop, international law and arbitration have emerged as promising alternatives, with global law firms leading initiatives to support bondholders worldwide. Bondholders currently have several legal avenues to consider, each with its own strengths and challenges:

Investor-state treaty arbitration
One of the most promising options available to Credit Suisse AT1 bondholders is pursuing claims through investor-state treaty arbitration. This route allows investors to bring claims against a sovereign state under international law, typically via a neutral international forum rather than a domestic court. The key advantage of this approach is its neutrality and independence from any national legal system, which is particularly important given the global nature of the bondholder base and the concerns that Switzerland’s actions may have violated internationally accepted norms.

Investor-state arbitration can offer a level playing field for bondholders from different jurisdictions, ensuring that the dispute is resolved according to principles of international law rather than the potentially restrictive frameworks of domestic courts. This process also allows for group representative actions, which can strengthen the position of bondholders and streamline proceedings. 

However, this form of arbitration must be initiated soon, as there are general principles under international law that claims should not be brought with undue delay. Switzerland is expected to argue for a three-year time bar, although many legal experts agree that such a limitation may not apply under international law. 

Suing Switzerland in the US
Some bondholders attempted to pursue claims against Switzerland in US courts. However, the US legal system has determined that Switzerland acted within its sovereign authority during the crisis and is therefore immune from such lawsuits. This decision effectively closes the door on US litigation as a viable route for bondholders seeking compensation for their losses. 

The outcome also reinforces the importance of seeking resolution through international arbitration rather than relying on domestic courts, which may be limited by principles of sovereign immunity.

Claims against FINMA in Swiss Federal Administrative Court
Another route has involved challenging the write-down in Swiss courts, specifically by pursuing claims against FINMA. The Swiss Federal Administrative Court’s recent ruling that the write-down lacked legal basis was a significant development. However, the court did not award financial compensation or reverse the decision – and FINMA has appealed.

Even if the appeal is unsuccessful and the write-down is reversed, it remains unclear where compensation would come from, as FINMA is a regulator and not responsible for investor losses. The court’s decision may be leveraged in international arbitration proceedings, potentially strengthening bondholders’ claims under international law.

Treaty action against Switzerland in Swiss courts
Some bondholders have considered pursuing claims under international treaties within the Swiss legal system. This route is complicated by jurisdictional issues, particularly for those who have already pursued claims in administrative courts. Switzerland may argue that bondholders who have elected to pursue one legal avenue are barred from switching to another. Additionally, it is uncertain whether Swiss courts would apply international law over Swiss law, and the prospects for success remain unclear. Group representative actions may help address some of these complexities, but legal clarity is still needed.

Suing UBS in the US
There are ongoing proceedings against UBS in US courts, with bondholders alleging mismanagement by Credit Suisse and questioning the role of UBS in the acquisition. These cases face significant hurdles, including questions of jurisdiction over non-US bondholders and those who purchased bonds from other banks. Establishing a causal link between alleged mismanagement and the write-down is also challenging. The outcome of these proceedings remains to be seen, and bondholders should monitor developments closely.

Overall, the legal landscape for Credit Suisse AT1 bondholders remains complex and fluid. International arbitration appears to offer the most promising path, especially given the limitations of national courts and the recent Swiss court ruling. Bondholders are encouraged to stay informed, act promptly to avoid potential time bars, and consider joining group actions to strengthen their position.