Consequences of Bankruptcy for Debtors and Creditors

The Consequences of Bankruptcy for Debtors and Creditors in Switzerland

Consequences of Bankruptcy: Debtor vs Creditors

Bankruptcy represents a complex legal procedure under Swiss law, entailing significant repercussions for both debtors and creditors. This legal mechanism, governed by the Federal Act on Debt Enforcement and Bankruptcy (DEBA), aims to settle in an orderly manner the relations between an insolvent debtor and all of their creditors. For the debtor, bankruptcy marks a break in their financial and legal situation. For creditors, it imposes a strict framework for claim recovery. Our law firm assists daily with natural persons, companies and creditors confronted with this procedure, whose implications go beyond the purely economic sphere to profoundly affect the rights and obligations of the parties concerned.

The Legal Framework for Bankruptcy in Switzerland

The Swiss bankruptcy system rests principally on the Federal Act on Debt Enforcement and Bankruptcy (DEBA), supplemented by its implementing ordinance (DEBA-O). This regulatory framework defines with precision the conditions for opening bankruptcy proceedings and their conduct.

Unlike other jurisdictions, Swiss law distinguishes two main pathways leading to bankruptcy:

• Ordinary bankruptcy, following unsuccessful enforcement proceedings
• Bankruptcy without prior enforcement proceedings, in specific cases provided for by law

In the first case, the procedure generally begins with an enforcement requisition by the creditor, followed by a payment order. If the debtor does not comply or does not file an opposition, the creditor may request continuation of the enforcement. For debtors registered in the commercial register, this continuation takes the form of a bankruptcy notice, which may lead to the effective opening of bankruptcy.

Specific Conditions for Bankruptcy Without Prior Enforcement

Swiss legislation provides for several situations where bankruptcy may be pronounced directly, without going through enforcement stages:

• Manifest insolvency (art. 191 DEBA)
• The debtor's own declaration of insolvency (art. 191 DEBA)
• Bankruptcy following an unsuccessful debt moratorium
• Cases provided for by the Code of Obligations, notably for limited companies (art. 725a CO)

The bankruptcy court, generally the president of the district or circuit court depending on the canton, is the competent authority to pronounce the opening of bankruptcy. This decision marks the formal beginning of the procedure and triggers a series of legal mechanisms with immediate consequences for the debtor and their creditors.

Legal and Financial Consequences for the Debtor in Bankruptcy

The opening of bankruptcy radically transforms the debtor's legal situation. From the bankruptcy judgment, the debtor loses the right to dispose of their assets. This dispossession constitutes one of the most immediate and constraining consequences.

Effects on the Debtor's Assets

All of the debtor's assets form the bankruptcy estate, now administered by the bankruptcy office or a special administrator. This estate comprises:

• All attachable assets belonging to the debtor at the time of opening of bankruptcy
• Assets acquired during the liquidation of the bankruptcy
• Assets subject to avoidance actions (suspicious transactions carried out before bankruptcy)

However, certain assets remain excluded from the bankruptcy estate, notably non-attachable assets defined by art. 92 DEBA, such as objects necessary for the exercise of a profession, essential personal effects or part of the salary considered as the minimum subsistence.

For a natural person, bankruptcy results in registration on the debt enforcement register for 5 years, considerably complicating access to credit and certain financial services. Likewise, certain regulated professions become inaccessible to bankrupts, such as the exercise of the bar in several cantons.

Restrictions on Civil and Professional Rights

Although the civic consequences of bankruptcy have been relaxed through successive legislative reforms, the bankrupt may still suffer certain restrictions:

• Inability to hold certain public functions in certain cantons
• Potential limitations in access to certain regulated professions
• Ineligibility for certain positions requiring an irreproachable financial reputation

For legal entities, bankruptcy generally leads to their dissolution and deletion from the commercial register following closure of the procedure. Directors may see their personal liability engaged in the event of breach of duties of diligence or loyalty that contributed to the insolvency of the company.

Status and Rights of Creditors in Bankruptcy Proceedings

Bankruptcy establishes a regime of equality between creditors, replacing the "first come, first served" principle with an orderly distribution according to strictly defined priority rankings. This collective organisation of creditors constitutes one of the fundamental principles of the procedure.

Classification of Creditors and Priority Order

Swiss law establishes a precise hierarchy between creditors, directly influencing their chances of recovery:

• Pledge creditors: They benefit from a priority right over the proceeds from the realisation of the pledged asset.
• Estate creditors: Debts contracted by the bankruptcy administration itself are paid in priority.
• First-class preferred creditors: Principally employee claims for the last six months and certain maintenance claims.
• Second-class preferred creditors: Notably social insurance claims.
• Third-class preferred creditors: Certain types of savings deposits.
• Unsecured creditors: All other creditors, without particular privilege.

This ranking structure determines the order in which creditors will be satisfied. A higher rank must be fully paid before a cent is distributed to the next rank, which explains why unsecured creditors often recover little or nothing in bankruptcies.

Filing and Verification of Claims

After the publication of the bankruptcy in the Swiss Official Gazette of Commerce (SOGC), creditors generally have one month to file their claims. This step is fundamental: a claim not filed within the period will not be taken into account in the distribution, with limited exceptions.

The bankruptcy administration then proceeds to verify the claims filed, and may admit them, reject them or admit them in part. The result of this verification appears in the schedule of claims, a central document that can be contested by dissatisfied creditors through an action contesting the schedule.

Conduct of the Liquidation and Distribution of Assets

Once bankruptcy is pronounced and claims verified, the crucial phase of asset liquidation begins. This step determines the amount effectively available to satisfy creditors.

Inventory and Preservation of Assets

The bankruptcy administration quickly draws up a complete inventory of the debtor's assets, taking conservatory measures to preserve their value. Certain perishable assets or those whose preservation would be costly may be sold immediately.

For companies, the delicate question of temporary continuation of activity arises. The administration may authorise this continuation if it benefits creditors, notably by preserving the value of the business for a bulk sale.

Realisation of Assets

The realisation of assets is generally carried out by public auction, although private sales are possible with creditors' agreement. The modalities differ according to the nature of the assets:

• For real estate: public auction with prior publication
• For movable property: auction or private sale depending on value
• For claims: assignment or recovery by the administration
• For securities: stock exchange or private sale

A particularity of Swiss law lies in the possibility of assigning to creditors the rights of the estate that were not exercised by the administration (art. 260 DEBA). This assignment allows an enterprising creditor to pursue certain legal actions (avoidance, liability) at their own risk but to their potential benefit.

Distribution of Liquidation Proceeds

The liquidation proceeds, after deduction of procedural costs, are distributed among creditors according to the schedule of claims. This distribution is carried out rank by rank, sometimes with several provisional distributions before the final schedule.

If the assets are insufficient to cover the liquidation costs, the procedure may be suspended for lack of assets (art. 230 DEBA). In this case, creditors may request assignment of remaining assets or require a summary liquidation by advancing the necessary costs.

Remedies and Alternatives to Bankruptcy under Swiss Law

Faced with the severe consequences of bankruptcy, the Swiss legal system offers various possibilities for contesting the procedure or exploring alternative solutions enabling total liquidation to be avoided.

Contesting the Bankruptcy Decision

The judgment pronouncing bankruptcy may be challenged through an appeal generally within a very short period (10 days). Grounds for appeal include:

• Full payment of the debt that motivated the bankruptcy
• Deposit of the full amount in dispute with the court
• Production of a declaration by the creditor withdrawing their requisition
• Substantial procedural defects

If the appeal is upheld, the bankruptcy is revoked and the debtor recovers full disposal of their assets. This revocation must be published in the same forms as the opening of bankruptcy.

The Debt Moratorium as an Alternative

The debt moratorium represents the main alternative to bankruptcy under Swiss law. This procedure aims to allow the restructuring of a company in difficulty or to organise a liquidation more advantageous than bankruptcy.

Initiated by an application from the debtor or a creditor, it begins with the granting of a provisional moratorium, generally of 4 months, renewable. During this period, a commissioner appointed by the court supervises the management of the company and assesses its restructuring prospects.

The moratorium may result in three types of composition agreements:

• The ordinary composition (dividend): the debtor proposes to pay a percentage of their debts
• The composition by surrender of assets: the debtor's assets are liquidated outside bankruptcy, often on more favourable terms
• The composition in bankruptcy: concluded after the opening of bankruptcy to exit it

To be confirmed by the court, the composition agreement must obtain the approval of a qualified majority of creditors and offer reasonable prospects of realisation.

Frequently Asked Questions about the Consequences of Bankruptcy