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Site contribution
Date: November 2010
Prepared by:
Brigitte Umbach-Spahn LL.M.
Dr. iur. Roland Burkhalter
WENGER PLATTNER
Seestrasse 39
Goldbach-Center
8700 Küsnacht-Zürich
Phone:   +41 43 222 38 00
Fax:   +41 43 222 38 01
E-Mail:   brigitte.umbach@wenger-plattner.ch
roland.burkhalter@wenger-plattner.ch
Summary
Swiss law provides for two types of proceedings for the enforcement of money claims referred to as "special execution proceedings" and "general execution proceedings" respectively.
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.
Special execution proceedings are often directed against private individual debtors. They also serve to reach the realization of a collateral or mortgage for the benefit of a single creditor.
General execution proceedings are mostly directed against companies. All creditors jointly participate in the realization of the debtor's asset. Swiss law provides for two types of general execution, i.e. bankruptcy and debt restructuring proceedings.
a)  Bankruptcy
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 specific procedure.
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 under Swiss law can be somewhat similar to the Chapter 11 proceedings provided by U.S. law, particularly with regard to the ordinary debt restructuring agreement which allows a debtor to dispose of a certain percentage of his debts and to continue to stay in business. Compared to U.S. chapter 11 proceedings, however, Swiss law focuses primarily on the rights of the creditors rather than on the continuation of the debtor's business activities.
Applicable Law
  • Federal Statute on Debt Enforcement and Bankruptcy of 11 April 1889 / revised as of 16 December 1994 (go to www.admin.ch/ch/d/sr/c281_1.html for full text in German, French or Italian)
  • 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
    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 hold an enforceable judgment against the debtor nor 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).
    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.
    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 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.
    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, i.e. bankruptcy proceedings and debt restructuring 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 are 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 and - for the time being (revision in progress) - claims by the federal tax administration concerning value added tax. Third class claims are all other claims against the debtor accrued prior to the opening of bankruptcy 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 needs, furthermore, 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.
    Frequently Asked Questions
  • 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:
  • ordinary debt restructuring agreement with partial waiver of debt whereby the debtor regains full authority to dispose and to continue his business, or
  • 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. 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 to note, however, 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 to - among other addressees - 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 of the liquidator to verify and assess all claims filed. To this end, the bankruptcy trustee or liquidator 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 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-border 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.
    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 have 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 (a 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 will 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. 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 favorable 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 favor of all other creditors.
    Useful Links
  •  
  • Restructuring and Insolvency 2010/2011
    Publication by Wenger Plattner
  •  
  • www.liquidator-swissair.ch
  •  
  • www.zefix.ch