In its dictionary sense, “negative declaration” denotes the establishment of a state of affairs in the negative. In legal language the expression corresponds to establishing through the courts that a person does not stand in the position of a debtor.
Article 72 of the Enforcement and Bankruptcy Act No. 2004 affords a person against whom enforcement proceedings have been commenced, or who faces the threat of such proceedings, on the basis of a debt that has in fact never arisen or of a legal relationship that is void, the opportunity to prove that he is not a debtor. The negative declaratory action is the name given to that opportunity.
Provided the conditions are met, the action may be brought both before enforcement proceedings begin and while they are pending. It affords the debtor two major benefits: the enforcement process may be suspended where certain conditions are satisfied, and, where the absence of the debt is confirmed by judgment, fresh enforcement proceedings or a fresh action in respect of the same debt are precluded. Below we address the conditions of the action, the regime of interim relief, the rules of proof and the financial consequences it produces.
The Nature and Statutory Basis of the Negative Declaratory Action
The Conceptual Framework
A negative declaratory action is an action brought by a person for a determination that he is not under a debt. Its function is to prevent enforcement proceedings from being pursued against a person, or that person from being held out as a debtor, on the basis of a debt that does not in fact exist.
The source of the institution is Article 72 of the Enforcement and Bankruptcy Act No. 2004. That provision opens to a person who does not accept the status of debtor the avenue of bringing an action, before enforcement proceedings are commenced or while they are continuing, in order to prove that he owes nothing.
Since this provision of the Enforcement and Bankruptcy Act No. 2004 bears the character of a declaratory action, the general principles laid down for declaratory actions in Article 106 of the Code of Civil Procedure No. 6100 apply to negative declaratory actions as well. For the purposes of Art. 106, the decisive criterion is that the claimant has an interest that is current and worthy of legal protection.
The Conditions Required for the Action to Be Brought
For a negative declaratory action to be entertained, the following conditions must be satisfied together:
- If enforcement proceedings have begun, the debt must not yet have been paid at the moment the action is brought. Once the debt has been paid, the avenue is no longer a negative declaratory action but an action for recovery of the payment.
- The creditor must either have commenced enforcement proceedings or have manifested an intention to collect by asserting the debt relationship; in other words, the assertion of a claim must be serious and genuine.
- No action for the annulment of the objection or action for payment must previously have been brought in respect of the same debt. Otherwise two sets of proceedings would be conducted in respect of a single debt.
- The claimant must have a current legal interest worthy of protection. This is the core condition of the action; a concern resting on mere possibility does not suffice, and the person must establish that he is genuinely under the threat of being held out as a debtor.
Assessment of the Legal Interest Requirement
Legal interest is required in a negative declaratory action as a procedural requirement. If the court concludes that the claimant has no such interest, it dismisses the action without examining the merits.
In Actions Brought Before Enforcement Proceedings
In actions brought before enforcement, for legal interest to be accepted the claimant must have been faced with a communication attributing a debt to him. A formal notice, a protest or any other letter containing a demand for payment sent by the creditor is assessed within this scope.
Even where no debt has been asserted against the person directly, however, it may be sufficient that he is in a legally uncertain or precarious position. In such cases too, a legal interest in bringing a negative declaratory action is accepted to exist.
In Actions Brought After Enforcement Proceedings Have Begun
Once enforcement proceedings have been commenced, the debtor has the possibility of suspending them by objecting to the debt. Since the proceedings have already been suspended, a legal interest in bringing a negative declaratory action in addition is as a rule not recognised.
By contrast, the debtor is accepted to have a legal interest in bringing an action in the following two situations:
- where the period for lodging an objection has been missed;
- where the objection lodged has been set aside by way of the removal of the objection obtained by the creditor.
On the other hand, if the debtor has paid the debt after enforcement proceedings began, he must bring not a negative declaratory action but an action for recovery of the payment. At that stage the aim is no longer to establish the absence of the debt but to recover money paid without justification.
Types of Action According to Timing
A negative declaratory action may be brought both before and after enforcement proceedings. The stage at which the action is brought directly affects its character and the consequences it will produce.
Actions Brought Before Enforcement Proceedings
Negative declaratory actions brought before any enforcement proceedings have been commenced are protective actions of a preventive character. The aim is to establish in advance the absence of the debt against enforcement proceedings that may be commenced in the future.
In this scenario the claimant, while asserting that he is not a debtor, may have been faced with a demand for payment from the creditor. A formal notice sent by the creditor, a protest drawn up, or any other letter exerting pressure to pay is an indication that the person is in a state of legal uncertainty.
An interim injunction may be sought from the court in these actions. Since enforcement proceedings have not yet begun, however, the scope of such relief is narrow; the courts generally confine themselves to provisional orders preventing the creditor from commencing enforcement proceedings.
The criteria required for an injunction to be granted at this stage:
- convincing documents supporting at first sight the claimant’s assertion that he is not a debtor must be submitted to the file;
- there must be a concrete threat of a debt or a risk of enforcement proceedings.
Actions Brought After Enforcement Proceedings Have Begun
Negative declaratory actions brought after enforcement proceedings have been commenced, on the other hand, are protective actions of a suspensory character. Here the person takes the route of an action by asserting, upon the payment order served on him, that he is not a debtor.
The most distinctive feature of this type of action is that, if an interim injunction can be obtained, the enforcement proceedings may be provisionally suspended.
For an order to that effect to be sought from the court, the following conditions must be present:
- Together with the request for an injunction, the debtor is expected to establish by strong evidence that the debt subject to enforcement does not exist.
- The debt must not yet have been paid at the moment the action is brought; if payment has been made, the avenue is not a negative declaratory action but an action for recovery.
- Security is required from the claimant. A measure with consequences as serious as the suspension of enforcement proceedings is not applied by the courts without security.
The injunction granted brings the enforcement steps to a standstill and provisionally lifts the pressure on the debtor’s assets.
The Interim Injunction and the Suspension of Enforcement
Bringing a negative declaratory action is an important step towards proving the absence of the debt; the continuation of enforcement proceedings while the case is pending may nevertheless cause the debtor serious hardship. For that reason the debtor may, together with his action, seek an interim injunction requesting that the enforcement proceedings be provisionally suspended.
The nature and scope of the relief differ according to whether the action was brought before or after the enforcement proceedings.
Suspension in Actions Brought Before Enforcement Proceedings
In negative declaratory actions brought before enforcement proceedings, Art. 72(2) of the Enforcement and Bankruptcy Act No. 2004 affords the debtor the possibility of obtaining from the court an interim injunction prohibiting enforcement proceedings, against security of not less than 15% of the claim.
Where such an order exists, even if the creditor commences enforcement proceedings the steps are suspended and no attachment may be levied. The debtor is thus protected from the pressure of enforcement until the proceedings are concluded.
Enforcement and Bankruptcy Act No. 2004, Art. 72(2)
“The court hearing a negative declaratory action brought before enforcement proceedings may, upon request, grant an interim injunction for the suspension of the enforcement proceedings in return for security to be furnished in an amount not less than fifteen per cent of the claim.”
There is a detail here that must not be overlooked: even where an injunction has been granted, the creditor’s right to commence enforcement proceedings is not extinguished. It is only because the enforcement steps are suspended that no attachment can in fact be levied.
For details on how attachment operates, our note entitled What Is Attachment? may be consulted.
Suspension in Actions Brought After Enforcement Proceedings
In negative declaratory actions brought after enforcement proceedings have begun, suspension of the proceedings by way of an interim injunction is not possible (Art. 72(3) of the Enforcement and Bankruptcy Act No. 2004). The debtor’s request for relief is granted only in limited situations.
Within this framework the debtor may, for the purposes of;
- preventing money paid into the enforcement office treasury from being paid over to the creditor,
- preventing an unjustified collection from taking place
request that the money held by the treasury not be transferred to the creditor, by furnishing security in an amount of not less than 15% of the claim in order to cover the loss that may arise from the delay.
The practice operates as follows:
- The security furnished is fixed so as not to fall below 15% of the claim.
- The debtor pays the whole of the debt, including the principal claim, interest and costs, into the enforcement office treasury.
- The total amount deposited reaches the level of 115% of the debt subject to enforcement.
This method is directed at preventing attachments exceeding the amount of the debt in the file (excessive attachment). The debtor has on the one hand furnished a guarantee of payment and on the other been protected from the threat of enforcement.
Fixing and Furnishing the Security
In both scenarios, the implementation of the injunction depends on the security assessed by the court being furnished in cash, by bank guarantee letter or by the other accepted instruments of security.
The Burden of Proof and the Evidence Available
In a negative declaratory action the outcome depends on the parties being able to establish their assertions by legally valid evidence. Which party bears the burden of proof and which evidence may be relied upon therefore directly determine the course of the proceedings.
Which Party Bears the Burden of Proof?
In negative declaratory actions the burden of proof may shift between the claimant debtor and the respondent creditor according to the nature of the dispute:
- As a rule, the claimant who denies the status of debtor is obliged to prove that he is not a debtor. A claimant who pleads, for example, that the debt has been paid is expected to document that payment.
- Where the claimant, by contrast, denies in its entirety the debt relationship on which the creditor relies — that is, where he asserts that no such debt ever arose — the burden of proof shifts to the respondent creditor. In that case the creditor must prove the legal relationship underlying the claim and the existence of the claim itself.
The basic rule as to the burden of proof is set out in Art. 190 of the Code of Civil Procedure No. 6100:
Code of Civil Procedure No. 6100, Art. 190
“The parties are obliged to prove the existence of the facts on which they rely.”
The Evidence That May Be Used
Since a negative declaratory action is heard under the general provisions of the Code of Civil Procedure No. 6100, the following evidence may be relied upon as to proof:
- The court-appointed expert report
- Documents amounting to written evidence
- The oath
- On-site examination
- Witnesses, in cases where the rule requiring a deed to be rebutted by a deed does not apply
- Statements of the parties
Where the claim is based on a negotiable instrument (a cheque, promissory note, bill of exchange or debt instrument), the principle that a deed may be rebutted only by a deed comes into play. In that case witnesses may as a rule not be heard; the claimant debtor must prove by written evidence that the instrument is invalid or that the debt never arose (Art. 200 of the Code of Civil Procedure No. 6100).
The Consequences Produced by the Judgment
Where the Action Is Allowed
If at the end of the proceedings the court is satisfied that the claimant is not a debtor, it rules that the action be allowed. The consequences of that judgment are as follows:
- The attachments over the debtor’s assets are lifted; if the attached assets have been sold, the proceeds obtained are returned to the debtor.
- The absence of the debt is established and that finding is embodied in the judgment.
- Once the judgment becomes final, the enforcement proceedings are annulled in their entirety.
- If the enforcement proceedings are continuing, they are suspended immediately.
In addition, if it is determined that the enforcement proceedings pursued against the debtor were unjustified and taken in bad faith, bad-faith compensation is awarded against the creditor upon the debtor’s request. Two criteria apply to this compensation: the amount is fixed at not less than 20% of the claim at issue, and the loss suffered by the debtor is taken into account when the amount is assessed.
Where the Action Is Dismissed
If the court concludes that the claimant debtor has failed to prove the absence of the debt, it dismisses the action. In that event any interim injunction previously granted ceases to have effect and the enforcement proceedings resume from the point at which they were suspended.
Furthermore, under Art. 72(4) of the Enforcement and Bankruptcy Act No. 2004, if the creditor has been compelled to collect his claim late, the court awards compensation of not less than 20% against the debtor of its own motion, without any separate request being required.
Note: A court judgment cannot be enforced unless it has become final. Attorney’s fees, litigation costs and bad-faith compensation may therefore be made the subject of enforcement proceedings only after the judgment has become final.
For details on this subject, our note entitled Court Judgments That Cannot Be Enforced Before Becoming Final may be examined.
Compensation Claims in the Negative Declaratory Action
Where the action is decided in the debtor’s favour, the benefit obtained is not merely escape from the enforcement proceedings; if the conditions are met, an award of compensation against the creditor may also be sought. Where the action is dismissed, by contrast, enforcement denial compensation may arise against the debtor.
Bad-Faith Compensation
Under Article 72 of the Enforcement and Bankruptcy Act No. 2004, if the negative declaratory action is allowed and it is established that the enforcement proceedings pursued against the debtor were unjustified and taken in bad faith, the court may award bad-faith compensation against the creditor.
The features of this compensation are as follows:
- the amount is fixed at not less than 20% of the claim at issue;
- an award depends on an express request by the debtor;
- the amount is assessed by the court having regard to the loss suffered by the debtor because of the unjustified enforcement proceedings.
Note: For bad-faith compensation to be awarded, there must be manifest bad faith or wrongfulness on the part of the creditor in the enforcement proceedings. The fact that the negative declaratory action has been allowed does not in itself give rise to this compensation.
Enforcement Denial Compensation
If the creditor succeeds in the proceedings, the court may order the debtor to pay enforcement denial compensation.
The conditions for this compensation fall under two headings: the creditor must be found to be in the right at the conclusion of the action, and a loss must have arisen from his having been compelled to collect the claim late.
Where the conditions are satisfied, the debtor is ordered to pay enforcement denial compensation of not less than 20% of the amount of the claim. The compensation may be made the subject of enforcement proceedings once the judgment has become final.
The Courts with Subject-Matter and Territorial Jurisdiction
Correctly determining subject-matter and territorial jurisdiction before the action is brought is of great importance. While the rules on subject-matter jurisdiction are regarded as a matter of public policy and are therefore taken into account by the court of its own motion, territorial jurisdiction must as a rule be raised by the parties.
The Court with Subject-Matter Jurisdiction
In a negative declaratory action, subject-matter jurisdiction is determined by reference to the nature and source of the claim subject to enforcement. Since the type of claim shows which field of specialisation the action falls within, the court with subject-matter jurisdiction is designated according to that criterion.
For the types of claim frequently encountered in practice, the courts with subject-matter jurisdiction are as follows:
- Employment claims → Labour Court
- Claims based on a consumer transaction → Consumer Court
- Claims of a commercial character → Commercial Court of First Instance
- Claims arising from a lease relationship or from the Condominium Ownership Act No. 634 → Civil Court of Peace
- Claims that do not fall within the remit of a specialised court → Civil Court of First Instance
The Court with Territorial Jurisdiction
As to territorial jurisdiction, the claimant has two options: the court of the place where the enforcement office conducting the proceedings is located, or the court of the place determined under the general and special rules on territorial jurisdiction in the Code of Civil Procedure No. 6100.
Since territorial jurisdiction is not a matter of public policy, neither the court nor the enforcement office takes the point of its own motion. Territorial jurisdiction can become a matter of dispute only if one of the parties raises an objection to jurisdiction within the period allowed.
The Statute of Limitations and Preclusive Periods
The legislation lays down no general limitation period specifically for the negative declaratory action. A person who does not accept the status of debtor may therefore bring this action for as long as he can establish his legal interest. Since there is no impediment tied to a period, recourse to the action is available without any time limit from the moment the threat of a debt arises.
Where the debt has been paid: the action for recovery and the one-year period. If, as a result of enforcement proceedings, the debtor has been compelled to pay an amount that he did not in fact owe, he must bring not a negative declaratory action but an action for recovery of the payment. To bring that action, steps must be taken within 1 year of the date of payment; if the period is missed, the right of action is extinguished by reason of the preclusive period.
The Independent Legal Assessment
The negative declaratory action is one of the most powerful defensive instruments available to a debtor; its effect, however, depends largely on timing. An action brought before enforcement proceedings begin can block those proceedings from the outset against security of 15%, whereas the same result cannot be achieved in an action brought after they have begun, and the debtor may be compelled to pay the whole of the debt into the treasury. That difference alone demonstrates the strategic weight of the decision to be taken at the stage of the formal notice.
The nature of the dispute is at least as decisive as the timing. The assertion that the debt never arose and the assertion that the debt has been paid place the burden of proof on different parties; and in enforcement proceedings based on a negotiable instrument, since the route of witness evidence is closed, the defence must be built on written evidence from the outset. In a concrete file the following headings should be clarified as a priority:
- Determining whether the action is to be brought before or after enforcement proceedings, and the interim relief strategy that follows from that
- Making the choice between denial of the debt and a defence of payment with the consequences for the burden of proof in mind
- Calculating in advance the amount of the security and the sum to be paid into the treasury, and planning the cash position accordingly
- Not overlooking the one-year period for an action for recovery where the debt has been paid
- Correctly identifying the court with subject-matter jurisdiction according to the nature of the claim, and raising any objection to territorial jurisdiction within the period allowed
- Ensuring that, where it is asserted that the enforcement proceedings were taken in bad faith, the claim for bad-faith compensation appears expressly in the statement of claim
Independent Legal provides advisory services and conducts litigation throughout the entire process in negative declaratory and recovery actions, from the design of the litigation strategy to the pursuit of applications for interim relief.