Avoidance Actions – What are they?

Debtors may be tempted to protect assets from access by a possible foreclosure. The avoidance action (also called "Pauliana") gives the bankruptcy administration, and under certain conditions the creditors, the opportunity to challenge such legal acts of the debtor. Upon approval of the actions, the assets will be foreclosed.

Challengable are (a) gifts made by the debtor during the last year prior to seizure or bankruptcy ("action to avoid a gift"), (b) legal acts by which the insol-vent debtor has favoured certain creditors within one year prior to seizure or bankruptcy ("voidability due to insolvency"); and (c) any legal action taken by the debtor within the last five years before the seizure or bankruptcy with the apparent intention of discriminating against its creditors or favouring individual creditors to the detriment of other creditors ("voidability for intent").

Under the current law, will foreign judgments on avoidance actions in Switzerland be recognized?

If, in the context of foreign foreclosure proceedings, legal action for avoidance against the debtor has been brought abroad, the question arises as to whether a judgment can be recognized in Switzerland and assets can be included in the foreign foreclosure.

The answer is no. According to the case law of the Federal Supreme Court, avoidance actions raised after the opening of bankruptcy proceedings do not fall within the scope of the Lugano Convention. Even under the Federal Act on Private International Law ("PILA") such judgments are denied recognition. The reason given is that avoidance actions are of an enforcement law nature while, according to Art. 25 et seq. PILA, only civil law matters can be recognized. This leads to the unsatisfactory situation that foreign judgments on avoidance actions are not recognized under the current law in Switzerland. A rare exception applies in the case of a bilateral state treaty in which a recognition of insolvency decisions has been agreed.

How can avoidance claims be enforced in Switzerland?

The foreign bankruptcy administration or the creditors entitled to avoidance only have the option of bringing an avoidance action in Switzerland. For this purpose, the foreign bankruptcy administration or bankruptcy creditor must first have the foreign bankruptcy decree recognized in Switzerland. Only then can a paulian avoidance action be raised in Switzerland. Among other things, this has the consequence that any grounds for avoidance which are available in the foreign foreclosure (e.g., the obligation to repay shareholder loans under German law) can not be asserted because the avoidance action in Switzerland is governed by Swiss law.

Revision of Chapter 11 of the PILA

The current revision of chapter 11 of the PILA seeks to remedy this unsatisfactory situation: According to a new provision (Article 174c PILA), foreign rulings on avoidance claims and other actions of the debtor that negatively affected the creditors should be able to be recognized under Art. 25-27 PILA if they are closely related to a bankruptcy decree recognized in Switzerland.

In the future, too, the prerequisite is that the underlying bankruptcy proceedings will be recognized in Switzerland. This is to ensure that the assets affected by bankruptcy-related proceedings in Switzerland could be included in a possible auxiliary procedure - a separate Swiss bankruptcy procedure limited to the assets located here - if this is carried out. However, if, at the request of the foreign bankruptcy administration, the implementation of an auxiliary procedure is waived, the bankruptcy administration can directly request the recognition and enforcement of foreign bankruptcy-related decisions (and thus foreign decisions on avoidance actions).