The standard debt enforcement process

A creditor who wants to enforce monetary claims against a Swiss debtor in financial distress usually needs a lot of time and money. The Swiss debt enforcement process is very formalistic and thus gives a debtor numerous possibilities to obstruct: The creditor has to file a debt enforcement request with the competent authority, a summons to pay will have to be served upon the debtor, the debtor can simply raise an objection against the summons what forces the creditor to have the objection set aside by a court, court decisions can be appealed, complaints can be filed, etc. If the debtor makes use of all the means the Swiss Debt Enforcement and Bankruptcy Act (“SDEBA”) provides, it can delay the process for years and cause substantial costs on part of the creditor.  

Art. 190(1)(ii) SDEBA and its significance in practice  

Art. 190(1)(ii) SDEBA can under certain circumstances be a useful tool to force debtors into bankruptcy within weeks and to recover at least a part of the owed amount within reasonable time. The article provides that every creditor can, without having to initiate debt enforcement proceedings, petition the competent court to declare bankrupt any debtor that would be subject to enforcement proceedings by bankruptcy if such debtor has ceased payments. Subject to enforcement proceedings by bankruptcy are in particular owners of registered businesses, registered partnerships, members of registered partnerships, stock companies and limited liability companies.  

The provision is interesting in practice because it is interpreted broadly by the courts. Debtors may not only be declared bankrupt if they ceased payments, but also if they are insolvent or over-indebted. According to statistics, in 2012, approximately 12’000 bankruptcy proceedings have been openend in Switzerland. The total economic damage caused by these debtors amounted to CHF 2.2bn. The average over-indebtedness per debtor thus amounted to CHF 180’000. It goes without saying that such an overindebtedness does normally not accrue overnight and goes along with an inability to pay debts when the fall due, i.e. insolvency.  

Even though the prerequisites for a declaration of bankruptcy based on art. 190(1)(ii) SDEBA would be met in a significant number of cases, the provision is not applied often in practice. In its Annual Report the Zurich Court of Appeal disclosed that 3’332 bankruptcy petitions have been filed in 2012. Only 67 or 2% of the creditors made use of the possibility of having a debtor declared bankrupt without the need of going through standard enforcement proceedings.  

What are the reasons for this surprisingly low figure? First of all, the fact that a declaration of bankruptcy based on art. 190(1)(ii) SDEBA requires litigation whereas regular debt enforcement proceedings are mainly of administrative nature surely has a deterrent effect. Second, a creditor is not always able to prove that its debtor is insolvent or overindebted. However, this problem is mitigated by the liberal admission and reliance on circumstantial evidence by the bankruptcy courts.  

What will a creditor have to prove?  

Art. 190(1)(ii) SDEBA requires a creditor to present prima facie evidence that he indeed is a creditor and to prove that the debtor ceased payments. According to case law, the term “ceased payments” also encompasses insolvency and over-indebtedness.

Insolvency is assumed if a debtor does not pay due and undisputed claims. In Switzerland, all debt enforcement proceedings are noted in a register. A creditor thus sees (i) how many other enforcement proceedings are pending, (ii) what amounts the debtors allegedly owes, (iii) what the bases of the alleged claims are and (iv) whether the debtor paid or raised objections. According to case law, insolvency is established if the creditor can show by means of a register extract that numerous proceedings have been initiated against a debtor and the debtor systematically raises objections even if the claims obviously have merit (e.g. tax claims, social insurance claims, claims based on an enforceable judgment, etc.). It is sufficient to prove that the debtor does not pay off its main creditors or a certain category of creditors, the debtor must not have ceased all payments.  

Over-indebtedness is given if the debtor’s liabilities exceed the value of its assets, i.e. if the equity is negative. Overindebtedness is more difficult to prove since the creditor will have to file the debtor’s balance sheets, and balance sheets of non-listed companies need not to be published in Switzerland. Thus, a creditor can often make its case only if it has access to financial information concerning the debtor, i.e. if the debtor has a contractual obligation to turn over its financial statements. Tax register extracts and resignation letter from the auditors may prove to be helpful, too. If a creditor can show circumstantial evidence that the debtor is in financial distress, some courts oblige the debtor to produce its financial statements, either sua sponte or based on a formal request of the creditor.  

Procedural aspects  

The bankruptcy judge at the domicile or registered seat of the debtor has jurisdiction over bankruptcy petitions based on art. 190(1)(ii) SDEBA. The petition is dealt with in summary proceedings, i.e. the means of evidence are limited and the process is expedited. The court costs do not exceed CHF 2’000 and the successful party usually is entitled to a compensation for its attorney’s fees.