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Federal Statute on Debt
Enforcement and Bankruptcy of 11 April 1889 / revised as of 16 December 1994
(got to
www.admin.ch/ch/d/sr/c281_1.html for full text in German, French or
Italian)
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Several rulings of the Swiss
Supreme Court on procedural aspects of insolvency proceedings (go to
www.amtsdruckschriften.bar.admin.ch to conduct a full text search in
German, French or Italian)
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Federal Statute on Private
International Law of 18 December 1987 (go to
www.admin.ch/ch/d/sr/c291.html for full text in German, French or Italian)
Detailed information
1. Procedural Requirements for Creditors to start
Enforcement Proceedings
Both types of enforcement proceedings are initiated by a
creditor (or a private individual/ company claiming to be a creditor) filing
an enforcement request with the competent debt enforcement authority
(Betreibungsamt) and asking for issuance of a payment summons to the debtor.
This payment summons is issued without the authority assessing the substance
of the alleged claim. With the payment summons the debtor is ordered to file
an objection within 10 days or pay the sum claimed within 20 days. If the
debtor files an objection, the creditor must refer to the competent court (see
art. 38 - 55 and art. 64 - 78 of the Federal Statute on Debt Enforcement and
Bankruptcy "SchKG"). If the creditor has already obtained an enforceable
judgment against the debtor or is in possession of a written acknowledgement
of debt signed by the debtor, he may apply for summary proceedings to
overcome the debtor's objection (art. 80 - 82 SchKG). If the creditor does
neither dispose of an enforceable judgment against the debtor nor of a signed
acknowledgement of debt, he must initiate full court proceedings within one
year of service of the payment summons (art. 88 SchKG) in order to assert his
claim and set aside the debtor's objection. If the debtor has not filed an
objection upon receipt of the payment summons or once the objection has been
set aside the creditor may request continuation of the enforcement
proceedings (art. 88 SchKG) with the competent debt enforcement authority.
This request either leads to seizure of certain of the debtor's assets (special
execution pursuant to art. 89 - 115 SchKG) or the opening of bankruptcy or
debt restructuring proceedings (general execution pursuant to art. 159 - 176
or art. 293 - 304 SchKG).
2. Procedural Requirements for Debtors to file for
Insolvency
Private individual debtors and companies with severe liquidity
problems and no prospects of recovery can initiate bankruptcy proceedings by
declaring insolvency with the competent court (art. 191 SchKG). Furthermore,
directors and auditors of corporate debtors must notify the court in case of
overindebtedness meaning that the liabilities exceed the assets (art. 725 of
the Swiss Code of Obligations). Along with the notice to the court,
respective balance sheets and an application for bankruptcy or the granting
of debt restructuring proceedings have to be submitted. The obligation to
notify the court is waived only if sufficient creditors subordinate their
claims vis-à-vis the other creditors to an extent covering the
overindebtedness.
3. Types of Enforcement Proceedings
3.1 Special Execution
Special execution proceedings are often directed against
private individual debtors. A creditor obtains realization of the debtor's
seizable assets to the extent necessary in order to cover the prosecuted
claim. Several creditors prosecuting their claims against the same debtor are
satisfied in chronological order. Special execution proceedings also serve to
reach the realization of a collateral or mortgage respectively against a
private individual or a corporate debtor for the benefit of the secured
creditor. This contribution does not further elaborate on special execution
proceedings as it primarily focuses on the so called general execution
proceedings.
3.2 General Execution
General execution proceedings are mostly directed against
companies. All known creditors jointly participate in the realization of the
debtor's assets. Swiss law provides for two types of proceedings of general
execution, bankruptcy proceedings and debt restructuring proceedings.
a) Bankruptcy Proceedings
With the opening of bankruptcy proceedings by the competent
judge the debtor loses his authority to dispose of his assets and all
business operations in general come to an immediate and final standstill. The
assets of the bankrupt debtor are realized by a court appointed bankruptcy
trustee under very strict rules and the respective proceeds distributed
proportionally to the creditors once their claims have been assessed by the
bankruptcy trustee following a hierarchy provided by Swiss insolvency law
(art. 219 SchKG). Creditors of an inferior class only participate in the
distribution of the proceeds once creditors of a superior class or classes
have been satisfied entirely. If the proceeds are not sufficient to satisfy
all creditors in one class, the available amount will be distributed equally
among them in proportion to the amount of their respective claims as a so
called dividend payment.
Firstly, creditors with secured claims are satisfied out of the
proceeds from the realization of the respective collaterals. Secondly,
creditors with unsecured claims are satisfied out of the liquidation-proceeds
of the estate in the following class order: first class claims in particular
are claims of employees having accrued within six months prior to the opening
of the bankruptcy proceedings and claims originating from premature
dissolution of employment relationships due to bankruptcy of the employer.
Second class claims in particular are claims by social security, health and
unemployment insurance institutions for employer contributions. Third class
claims are all other claims against the debtor accrued prior to the opening
of bankruptcy proceedings.
b) Debt Restructuring Proceedings
As opposed to bankruptcy proceedings, debt restructuring
proceedings allow for a limited continuation of the debtor's business
activities and for a more flexible realization of the debtor's assets and are,
therefore, often likely to yield higher proceeds to be proportionally
distributed to the creditors ("Debt Restructuring Proceedings per the Revised
Debt Prosecution and Bankruptcy Statute",
Publication by Wenger Plattner).
The first phase of debt restructuring proceedings is a so
called debt restructuring moratorium. A debt restructuring moratorium
(Nachlassstundung) may be granted by the competent judge provided that the
debtor's remaining assets cover all privileged claims and any debts of the
estate i.e. obligations incurred to continue the debtor's business activities
after the debt restructuring moratorium has been granted (Masseschulden, art.
306 SchKG). During the debt restructuring moratorium the management of the
company is still in place, it acts, however, under the supervision of a court
appointed administrator. The disposal over certain assets furthermore needs
the approval of the judge. In general no enforcement proceedings may be
initiated or continued against the debtor during the debt restructuring
moratorium (art. 295 - 298 SchKG).
Debt restructuring proceedings can lead to the conclusion of an
ordinary debt restructuring agreement (Dividendenvergleich; art. 314 et seq.
SchKG) whereby the creditors agree to a settlement allowing the debtor to
dispose of a certain percentage of his debts and continue his business
activities resuming full authority to dispose.
On the other hand, debt restructuring proceedings can lead to
the conclusion of a debt restructuring agreement with assignment of assets
(Nachlassvertrag mit Vermögensabtretung; 317 et seq. SchKG) which - as in
bankruptcy proceedings - leads to the dissolution and liquidation of the
debtor company. The debtor assigns his assets to all creditors for
realization by a creditor elected and court appointed liquidator in a similar
but more flexible way as it would be done in a bankruptcy. The proceeds are
distributed proportionally to the creditors once their claims have been
assessed by the liquidator. The distribution is effected according to the
hierarchy of creditors provided by Swiss insolvency law in art. 219 SchKG (for
details please refer to section 3.2 a) above):
For both types of debt restructuring agreements (ordinary debt
restructuring agreement and debt restructuring agreement with assignment of
assets) Swiss law requires the approval by a certain majority of the
creditors as well as the competent judge.
Who may initiate bankruptcy or debt restructuring proceedings?
Other than the debtor himself, any creditor having completed the first stage
of the enforcement proceedings (see section 1 of Detailed Information above)
may file a petition with the competent court (see art. 46 - 55 SchKG)
requesting the opening of bankruptcy or debt restructuring proceedings
against a company.
When should debt restructuring proceedings be opted for rather than
bankruptcy proceedings?
With the opening of bankruptcy proceedings all of the debtor's business
activities are immediately and irreversibly discontinued. Usually a state
official is appointed as bankruptcy trustee. The realization of the debtor's
assets is subject to very strict rules. This entails the risk that the
debtor's assets cannot be realized in the most profitable fashion.
As opposed to bankruptcy proceedings, debt restructuring proceedings allow
for a limited continuation of the debtor's business activities. Under the
supervision of a court appointed administrator this grace period allows to
determine whether one of the following two solutions can be reached:
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ordinary debt restructuring agreement with partial waiver of debt whereby the
debtor regains full authority to dispose and continue his business, or
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debt restructuring agreement with assignment of assets whereby the debtor's
assets are liquidated by a creditor elected and court appointed liquidator
under far more flexible rules than in ordinary bankruptcy proceedings.
Usually a private individual (specialised insolvency lawyer or accounting
firm) is appointed as administrator or liquidator respectively. In case there
is real prospect of recovery subject to partial waiver of debt or if the
realization of the debtor's assets requires flexible rules to yield good
return (in particular if the realization of assets includes the sale of group
companies, assets located abroad, restructuring of complex finance agreements
etc.) debt restructuring proceedings should be taken into account rather than
bankruptcy proceedings. It is however to note that certain financial
requirements need to be met for the granting of a debt restructuring
moratorium: There have to remain assets sufficient to cover privileged claims
(in particular the claims of employees for six month prior to the granting of
a debt restructuring moratorium), and any debts of the estate after the debt
restructuring moratorium is granted. This means that a petition for the
granting of a debt restructuring moratorium has to be envisaged at a fairly
early stage and requires careful liquidity planning.
How do creditors learn of bankruptcy or debt restructuring proceedings?
The court ordering the opening of bankruptcy proceedings against a debtor
serves its decision among other addressees to the commercial register and to
the competent bankruptcy authority (art. 176 SchKG). The competent bankruptcy
authority (Konkursamt) publishes the opening of bankruptcy proceedings in the
Swiss Official Gazette of Commerce (www.shab.ch)
as soon as it has verified that the debtor's assets will cover the cost of
bankruptcy proceedings (art. 232 and 35 SchKG). This publication identifies
the debtor by name and domicile and contains a call to creditors to file
their claims with the competent bankruptcy trustee within a month of the
publication. Also this publication contains an invitation to all creditors to
take part in a first creditors' meeting to take place within 20 days after
the publication. With this publication, the competent bankruptcy trustee
informs foreign creditors that the bankruptcy trustee will serve as address
of service until an address of service in Switzerland is designated. Moreover
the bankruptcy trustee is obligated to individually notify the opening of
bankruptcy proceedings concerning the debtor to each creditor whose name and
address are known.
The granting of a debt restructuring moratorium is also entered into the
commercial register and published in the Swiss Official Gazette of Commerce
(art. 296 SchKG). The court appointed administrator publishes a call to
creditors in the same media to file their claims with the administrator
within 20 days of publication and invites all creditors to take part in a
creditors' meeting to take place. Known creditors are notified individually.
How do creditors assert their rights in bankruptcy or debt restructuring
proceedings?
In bankruptcy or debt restructuring proceedings creditors are asked to file
their claims with the competent bankruptcy authority or the court appointed
administrator and to provide proof for their claim. It is then the duty of
the bankruptcy trustee and in case of a debt restructuring agreement with
assignment of assets the liquidator respectively to verify and assess all
claims filed. To this end, the bankruptcy trustee or liquidator respectively
draws up a so-called schedule of claims ("Kollokationsplan") to ensure a
legally valid and binding establishment of the creditors who are to share the
proceeds of liquidation, their order and admitted claim amounts. Once the
schedule of claims is complete, all creditors will be informed by publication
that the schedule of claims is available for inspection. Furthermore, all
creditors whose claims have been entirely or partially rejected or who have
not been accorded the requested privilege status are to be informed by
individual notice about the availability of the schedule for inspection and
the rejection of their claim.
The creditors then have the possibility to challenge the assessment of the
claims by the bankruptcy trustee or the liquidator respectively by contesting
the schedule of claims in court. In this regard, Swiss Insolvency Law allows
two ways of contesting the schedule of claims. Firstly, a creditor whose
claim has not been fully admitted can contest the schedule. In addition,
every creditor has the right to challenge the way the claim of another
creditor has been recorded.
Are measures to secure claims established under foreign laws insolvency
proof in Swiss insolvency proceedings?
Not all measures to secure claims validly established under foreign laws are
insolvency proof in Swiss insolvency proceedings. With a view to
cross-boarder transactions in particular the strict Swiss rules on the
requirement for possession by the pledgee for liens on moveable goods and the
requirement for formal registration of retention of title might be a
stumbling block (publication by Brigitte Umbach-Spahn on "Means of securing
claims under Swiss Law " soon to be uploaded).
For a lien on movable goods Swiss law requires that the pledger has indeed
given up exclusive possession of the goods subject to the lien. Foreign
jurisdictions often allow for the valid construction of a lien allowing the
pledger to keep the goods in its possession. If the object that is subject to
such foreign lien is moved to Switzerland the securing effect in rem becomes
void and the respective lien on moveable goods does not withstand the
insolvency of a Swiss pledger. The object is drawn into the estate and the
pledgee does not dispose of any exclusive right to the proceeds of the
realization of the object.
In the event that retention of title has been agreed abroad and the
respective object is moved to Switzerland it is important to note that in
order to uphold the securing effect of the retention of title in case of the
insolvency of the buyer it has to be entered into the respective public
register in Switzerland. If no entry in the respective public register is
effected such retention of title does not provide any protection for the
creditor when insolvency proceedings are opened against the buyer in
Switzerland.
Do Swiss insolvency proceedings protect the assets abroad from being
attached by non-privileged and unsecured creditors?
To provide best return to the creditors and ensure equal treatment among all
creditors worldwide, Swiss insolvency law is designed to encompass all assets
of the debtor, irrespective of whether or not they are located in Switzerland
or abroad. However, many of the foreign jurisdictions do not automatically
recognize the effects of Swiss insolvency proceedings on assets located
abroad. Creditors often try to take advantage of the situation and attach
assets abroad to get full payments for their claims instead of the dividend
payment they are entitled to in the Swiss insolvency proceedings. The key to
avoid such attachments, prevent piecemeal distribution of the foreign assets
and ensure the equal treatment of all creditors worldwide, often is to
initiate ancillary insolvency proceedings abroad and shape them so as to
allow for a close cooperation between the foreign and the Swiss office
holders. The experience in the Swissair case shows that such means work well
in particular vis-à-vis the United States.
Are U.S. insolvency proceedings recognized in Switzerland?
Switzerland does not follow the principle of automatic recognition of orders
of foreign authorities concerning the opening of insolvency proceedings
outside Switzerland. The recognition of a U.S. or other foreign insolvency
order always requires a formal request by the foreign office holder to the
competent Swiss judge (art. 166 et seq. of the Federal Statute on
International Private Law). In addition, this Statute provides that the Swiss
judge may only recognize specific types of foreign insolvency orders and only
if certain pre-requirements are met (such as equal treatment of creditors,
reciprocity etc.). If a foreign insolvency order is recognized in Switzerland,
ancillary insolvency proceedings are opened in Switzerland (so called mini
bankruptcy) under the guidance of a Swiss office holder. The Swiss assets of
the foreign debtor are realized by the Swiss office holder according to Swiss
insolvency rules and the proceeds first distributed to secured and unsecured
creditors domiciled in Switzerland. Any balance is remitted to the foreign
office holder if certain requirements (in particular fair and equal treatment
of Swiss unsecured creditors in foreign insolvency proceedings) are met.
What are the effects of the opening of bankruptcy or debt restructuring
proceedings on current contracts of the debtor?
With the opening of bankruptcy all obligations of the debtor become due with
the exception of those which are secured by mortgages or real estate (art.
208 SchKG). Claims against the debtor other than money claims are generally
converted into money claims (art. 211 par. 1 SchKG). However, in case a
certain agreement contains outstanding contractual obligations of both the
debtor and the contracting creditor, the competent bankruptcy trustee may
commit the estate to meet the contractual obligation in lieu of the debtor.
The bankruptcy trustee will do so if the satisfaction of the respective
agreement increases the estate to the benefit of all creditors.
In case of debt restructuring proceedings two phases have to be distinguished:
Upon granting of a debt restructuring moratorium the debtor remains bound by
his agreements but the creditor may not enforce his obligation during the
term of the debt restructuring moratorium. Only if the administrator
explicitly commits the estate to enter into certain agreements the respective
obligations of the debtor become debts of the estate. If later on a debt
restructuring agreement with assignment of assets is concluded, a similar
mechanism applies as in case of bankruptcy.
Can creditors sue the directors of a bankrupt company or a company subject
to debt restructuring liquidation for breach of obligation for executive care?
The area is complex and the answer depends on what type of claim the creditor
wants to assert:
Irrespective of ongoing insolvency proceedings, a creditor may at any time
assert liability claims against directors if he demonstrates that the
directors caused the creditor directly and individually to suffer financial
loss incurred by an action or actions violating legal provisions exclusively
established to protect the interests of the creditor (and not the company).
As most of the obligations of directors stipulated by Swiss corporate law
serve to protect either the interests of the company or both the interests of
the company and the creditor, it is the general view that cases in which a
creditor may successfully sue a director based on his own right as explained
above are very rare.
All other types of corporate liability claims against directors must in
principle be asserted by the competent bankruptcy trustee or the court
appointed liquidator as they constitute an asset to be realized to the
benefit of all creditors. However, office holders often conclude that law
suits against executives of the debtor company are subject to substantial
risks and costs for the estate and therefore constitute assets that are
difficult to realize. In that case the respective office holder may decide
not to assert liability claims but instead offer the right to sue to be
assigned to the creditors (art. 260 SchKG). One or several creditors may wish
to assert the liability claims in lieu of the office holder. Any proceeds
collected by these creditors in case of a favourable outcome of the
respective law suit serve to fully cover the costs of litigation and their
claims against the debtor. Any surplus is remitted to the estate for
distribution in favour of all other creditors.
www.liquidator-swissair.ch
www.zefix.ch
www.schkg.ch
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