When the debtor reshuffles the deck – undue preference to creditors

Shortly before a company collapses, its finances are reviewed one last time and funds are distributed. It is not uncommon for the remaining funds to be channelled not equally amongst all those who stand to benefit, but rather in a targeted manner – for example, to favoured suppliers, to the bank for which the managing director has provided a personal guarantee, or to a related company. The remaining creditors are often left with a certificate of loss. Swiss law addresses this behaviour on two levels simultaneously: under criminal law through the offence of undue preference to creditors in Article 167 of the Swiss Criminal Code (SCC), and under enforcement law through the avoidance action under Article 285 et seq. of the Swiss Debt Enforcement and Bankruptcy Act (DEBA), known as the ‘Pauliana’. The following article focuses on the criminal law aspect.

The offence of undue preference to creditor

Under Article 167 of the Swiss Criminal Code, a debtor is liable to prosecution if, being aware of their insolvency and with the intention of favouring certain creditors to the detriment of others, undertakes acts to that end, in particular by paying debts that are not yet due, settling a debt that is due by means other than the usual means of payment, or securing a debt from his own funds without being obliged to do so, where bankruptcy proceedings have been opened against him or a certificate of loss has been issued against him.

Only an insolvent debtor may be regarded as a potential perpetrator. A debtor is deemed insolvent if they are unable, on more than a temporary basis, to settle claims that have fallen due. If the insolvent debtor is a legal entity, the scope of eligible perpetrators is extended, pursuant to Article 29 of the Swiss Criminal Code, to include governing bodies, shareholders, employees with decision-making authority or de facto managers.

The specific acts in question

The acts listed in Article 167 of the Swiss Criminal Code and in the previous section are merely illustrative. The provision covers all acts by the debtor which are intended to give preference to individual creditors to the detriment of others. These include payments to which the creditor is not entitled at the time of the offence, or, in exceptional cases, payments of an equivalent degree of wrongfulness. Finally, the offence does not require that any actual harm occur. Nor does the disadvantage need to serve as the cause of, or be causally linked to, the offence. In this sense, the elements of the offence are already satisfied if the preferential treatment creates a significant and unjustified inequality between the creditors.

On a subjective level, the offence requires intent. In this regard, it is sufficient if the perpetrator considers the fulfilment of the elements of the offence to be possible and accepts this as a consequence. It is also necessary that the debtor is aware of their insolvency and that they likewise accept that certain creditors will be favoured over others.

Conclusion

The offence of undue preference to creditors (Article 167 of the Swiss Criminal Code) can be committed very quickly: even a single act carried out in the knowledge of one’s own insolvency – such as settling a single claim whilst neglecting other creditors – may constitute the offence, provided that the debtor has at least accepted the possibility of such preferential treatment. Given the low threshold in both objective and subjective terms, debtors in financially strained situations would be well advised to scrutinise their payment behaviour and, where in doubt, seek legal advice before settling individual debts.