In the scheme of enforcement constructed by the Enforcement and Bankruptcy Act, the final link is the distribution stage, at which the money obtained is shared out among the creditors. Where there is a single creditor in the proceedings this stage is straightforward; the picture changes, however, where several creditors are pursuing the same debtor. If the proceeds of the sale of the debtor’s attached assets cover all the claims, distribution is made directly, but where the proceeds fall short, the question of who is to recover how much and with what priority is answered by statutory criteria.
It is at this point that the enforcement office comes under a duty to draw up a ranking schedule without awaiting any request. In bankruptcy liquidations the schedule is prepared in every case, irrespective of whether the proceeds are sufficient. The ranking in the schedule is not arbitrary; it is established having regard to the nature of the claim, whether it is secured by a pledge and any privilege it carries.
The enforcement director who prepares the schedule is bound by the provisions of the Enforcement and Bankruptcy Act and by the procedural rules of enforcement law. Where an act departing from that framework is performed, the avenue of complaint to the enforcement court is open to those concerned. In addition, a creditor may bring an action for objection to the ranking schedule, targeting the amount or the ranking of another creditor entered in the schedule. In this briefing note we assess, from a practical standpoint, the conditions, time limits and consequences of both avenues.
The Concept of the Ranking Schedule
A ranking schedule is an official document setting out the priority in which, and the proportions in which, the proceeds arising from the conversion of the debtor’s assets into money in proceedings pursued by way of attachment or bankruptcy are to be divided among a number of creditors. In attachment proceedings the document is drawn up by the enforcement office and, in bankruptcy, by the bankruptcy administration.
Only one condition is required for a schedule to arise: that the sum obtained from the sale cannot meet all the claims. In such a situation, the hierarchy in which the claims are to be met is determined according to the priority provisions laid down by the statute. The ranking schedule is therefore the fundamental instrument ensuring that distribution among creditors proceeds equitably, both in the sale of attached assets and in bankruptcy liquidation.
The Duty of the Enforcement Director and the Procedure Followed
The schedule must be prepared before the proceeds obtained from the attached assets are transferred to the creditors, and this is carried out by the enforcement office of its own motion. Since that duty arises directly from statute, no request from the parties is required. In establishing the ranking, the director assesses together whether the sale proceeds are capable of meeting the claims, the legal basis of each claim, the existing rights of pledge, public claims and the position as to privileges.
Notifications of Claims and the Content of the Schedule
The schedule includes not only the creditors already recorded in the enforcement file but also other persons who notify their claims within the statutory period. A creditor giving notice is expected to set out clearly the document relied upon, the sum claimed and any right of pledge.
The schedule as prepared contains the following information:
- The order in which and the proportion in which payment is to be made
- The legal nature and the amount of the claim
- The document on which the claim is based (such as the request for enforcement, a promissory note or a judgment)
- Whether the claim is secured by a pledge or a privilege
- Information as to the identity of the creditor
A schedule drawn up with that content is binding as regards the distribution of the money. Once the document has been served on those concerned, the statutory period for complaint and objection also begins to run.
Two Different Processes in Which the Schedule Is Drawn Up
Following the Sale of Attached Assets
In proceedings pursued by way of attachment, where the sum arising after the debtor’s assets have been converted into money does not fully meet the claims of several creditors, the enforcement director draws up a schedule of his own motion. That document is a binding list showing the amount claimed by each creditor, the basis of the claim and the order in which payment is to be made.
Once drawn up, the schedule is served on those concerned. Creditors receiving service have 7 days in which to resort to complaint or objection against the content of the schedule. If no application is made within that period, the schedule becomes final and payment is made exactly in accordance with the order set out in it.
In Bankruptcy Liquidation
In proceedings by way of bankruptcy, drawing up a schedule is not an option but an obligation. If the schedule is not prepared within the statutory period, the bankruptcy office refers the matter to the enforcement court; the court has power to remove the members of the bankruptcy administration from office.
Where the liquidation is conducted by the ordinary procedure, creditors notify their claims in writing to the bankruptcy administration and, in simple liquidation, to the bankruptcy directorate. The bankruptcy administration draws up the schedule after examining whether the person giving notice genuinely holds the status of creditor, and the legal basis and amount of the claim.
The schedule is confined to the claims that are admitted. Persons whose claims are not admitted at all, or are admitted in part, may bring an action for objection against the schedule. The same possibility is available to creditors contesting the inclusion of another creditor in the schedule or the ranking accorded to that creditor.
The forum in which this action is to be brought is the Commercial Court of First Instance at the place where the bankruptcy was declared. Where the bankruptcy administration has acted unlawfully, the avenue of complaint before the Enforcement Court may be taken.
The essence of the distinction is this: a creditor contesting the rejection or partial admission of his own claim turns to an action for objection, whereas a creditor targeting the ranking or the amount of another creditor should choose the avenue of complaint.
The Hierarchy of Priority Among Creditors
Where the proceeds obtained from the sale are insufficient for all the claims, it becomes decisive who takes precedence in recovery. That ranking is established according to the type of claim and the security or privilege it carries. The applicable rules differ according to the type of proceedings: in proceedings by way of attachment, Art. 206 of the Enforcement and Bankruptcy Act No. 2004, which sets out the classification of claims and the order of payment, is taken as the basis, whereas in bankruptcy liquidation Art. 140 of the same Act comes into play. Since in bankruptcy pledged claims are kept separate from the assets of the estate, they are as a rule recovered first.
Claims Secured by a Pledge
The first rung of the schedule is occupied by claims secured by a pledge. A pledge is a right in rem affording the creditor a priority right of recovery over the debtor’s movable or immovable property. If the asset sold is the subject of a pledge, the pledged claim is met first out of the proceeds. If the proceeds do not cover the whole of the claim, the creditor joins the general ranking together with the other creditors as regards the uncovered portion.
The Position of Public Claims
Immediately after pledged claims come the public claims of the State. Tax debts and social security contributions are typical examples of this group. With a view to enabling public services to be maintained without interruption, these claims have been accorded priority by statute.
Privileged Claims
Among the privileged claims on the third rung are employees’ wage claims, maintenance claims and certain claims arising from particular statutes. Placed under special protection on grounds of social justice, these claims rank ahead of ordinary creditors.
Unprivileged Claims
Once pledged, public and privileged claims have been met, it is the turn of unprivileged (ordinary) claims. This group consists of general claims carrying no security or special priority. Since the principle of equality applies among them, those on the same rung take a share of the sum recovered in proportion to their claims.
Service and Finality of the Schedule
Two conditions must be met for a ranking schedule to produce legal effect: it must be duly served on those concerned and it must become final. Once the schedule has been prepared, written notification is issued to all the creditors included in it; in attachment proceedings that is carried out by the enforcement office and, in bankruptcy liquidation, by the bankruptcy administration.
Service affords creditors, at one and the same time, the opportunity to examine the content of the schedule, to learn the amount and ranking of their own claims, and to make an application against the points they consider unlawful.
Service is effected in accordance with the provisions of the Enforcement and Bankruptcy Act and sets running a preclusive period of 7 days from the date of service. Within that period creditors may resort to complaint or objection against the schedule.
If the statutory period passes without an application, the schedule becomes final. Finality is a precondition of payment being made to the creditors, since distribution cannot proceed on the basis of a schedule that has not become final. This is a fundamental threshold impeding the progress of the enforcement process.
Application by Way of Complaint
The first of the avenues available against the schedule is the complaint. A complaint is an application made to the enforcement court under Article 16 of the Enforcement and Bankruptcy Act No. 2004 against acts of enforcement offices that are contrary to the statute. Accordingly, if the enforcement director has performed an act contrary to the statute or to enforcement law in drawing up the schedule, those concerned may go to the enforcement court and exercise the right of complaint against that act.
The Procedure to Be Followed Before the Enforcement Court
The application may be made to the enforcement court in writing, or it may be expressed orally by declaration at the hearing. The application must be made within 7 days, and the period begins to run at the moment the schedule is served on the person concerned.
The scope of the examination on complaint is confined to unlawfulness. The enforcement court does not enter into the substance of the material right; it confines its review to matters of procedure and form. For detailed information on the subject, reference may be made to our note entitled Complaint Against an Act of the Enforcement Office.
Grounds for Complaint and the Consequences It Produces
The principal situations in which a complaint against the schedule arises are as follows:
- The creditor being entered in the wrong rank or left out of the schedule: Where a creditor has not been placed in the rank claimed, or has found no place at all in the schedule, a right of complaint arises under Art. 142(3) of the Enforcement and Bankruptcy Act No. 2004.
- Proceeding to payment before the schedule becomes final: As a matter of principle, payment may not be made to creditors on the basis of a schedule that has not become final; if the distribution stage has been reached notwithstanding that prohibition, intervention may be made by way of complaint.
- Irregular service or a defectively drawn schedule: A failure to serve the schedule on those concerned at all, its preparation in a manner contrary to procedure, or its containing incomplete information are likewise grounds for complaint.
If the application is found well founded, the enforcement court annuls the act or decision of the enforcement office and, where necessary, orders the schedule to be drawn up afresh. If the complaint is dismissed, the schedule becomes final and distribution continues from where it stood.
Objection by Way of an Action
The second avenue of application is the action for objection. That avenue is provided for objections directed at the claim or the ranking of another creditor appearing in the schedule drawn up by the enforcement office or the bankruptcy administration. Such objections do not fall within the scope of complaint; they take the form of a civil action subject to the general provisions.
A person contending that a creditor entered in the schedule ought not in fact to appear in it at all, that the amount of the claim has been calculated incorrectly, or that its ranking has been wrongly determined, may resist the schedule by bringing an action for objection. What is debated in that litigation is not the act of the enforcement director but the soundness, as a matter of substantive law, of the right and ranking of another creditor entered in the schedule.
The Time Limit for Bringing the Action (Enforcement and Bankruptcy Act No. 2004, Art. 142)
An action for objection against a schedule prepared following the sale of attached assets must be brought within 7 days of the date of service. Missing that period, which is preclusive in nature, removes altogether the possibility of bringing an action against the schedule. The period begins at the moment the schedule is served on the creditor concerned.
In bankruptcy the position is different: those wishing to object to the schedule must bring an action within fifteen days of the date of publication, before the Commercial Court of First Instance at the place where the bankruptcy was declared.
Subject-Matter and Territorial Jurisdiction
Jurisdiction in an action for objection against the schedule is determined as follows. For objections directed at a schedule prepared after the sale of attached assets, the court with subject-matter jurisdiction is the Civil Court of First Instance; in an action objecting to a bankruptcy schedule, jurisdiction lies with the Commercial Court of First Instance at the place where the bankruptcy was declared. As regards territorial jurisdiction, the place to be taken as the basis is that of the enforcement office which drew up the schedule.
Since these actions require an assessment relating to substantive law, they fall within the province of the general courts rather than the enforcement court. That is also the fundamental point distinguishing an action for objection from the avenue of complaint.
Procedural Requirements and Capacity to Be a Party
For an action for objection to be entertained, the claimant must have a legal interest as against the claim or ranking of another creditor appearing in the schedule, must possess capacity to be a party, and must bring the action within the statutory period. In addition, the grounds of objection must be set out in the statement of claim in concrete terms rather than in abstract formulations.
The parting of the ways may be summarised thus: a creditor complaining of his own ranking must apply to the enforcement court, whereas a creditor contesting the inclusion of another creditor in the schedule or that creditor’s ranking must bring an action for objection. A person saying, for example, “I have been entered in the fourth rank, whereas I ought to have been in the third” takes the avenue of complaint; a person saying “the place of the person entered in the third rank is in fact the fourth” brings an action for objection.
Submission of Evidence and the Procedure at Trial
The action for objection is heard under the simplified procedure. The claimant must submit to the file, together with the statement of claim, the concrete evidence on which the objection is based (documents, witnesses, an expert examination and the like), and must prove the assertion throughout the proceedings.
The court conducts its examination on the papers or with a hearing and decides whether it is necessary to make a change to the schedule. Unless and until the judgment given becomes final, the enforcement office may not make payment in accordance with the schedule; the sole exception to this is the payment against security regulated in Art. 142/a of the Enforcement and Bankruptcy Act No. 2004.
The Consequences Produced by the Action for Objection
An action for objection brought against the schedule is broad enough to affect not only the position of the claimant creditor but the schedule as a whole. The judgment the court gives may alter the order of payment of the creditors, their shares, and even the entirety of the schedule. In that respect actions for objection produce serious consequences leading to distribution being halted or postponed.
Correction Made to the Schedule
If the court finds the objection well founded, the change may be confined to the ranking of the creditor concerned. If it is established that a creditor shown in the fourth rank ought in fact to be in the second, that creditor’s position is corrected by the court’s judgment. In that event the enforcement office partially reconstitutes the schedule in accordance with the judgment.
Partial or Total Annulment of the Schedule
If it is concluded that the claim objected to is wholly invalid, or that it has been placed in a particular rank without justification, the court may annul the relevant part of the schedule. Where several serious procedural defects or unlawful features are established in the schedule, it is possible for the annulment of the whole of it to be ordered.
Following a judgment of annulment, the enforcement office is obliged to prepare a new schedule. That in turn may bring with it a fresh process of service and objection for the creditors.
Postponement of Distribution and Other Effects
The bringing of an action for objection as a rule halts the distribution measures based on the schedule; the natural consequence is that recovery by the creditors is prolonged. However, under Art. 142/a of the Enforcement and Bankruptcy Act No. 2004, if the creditor faced with the objection provides a definitive letter of guarantee, the sum falling to that creditor’s share may be paid.
The picture beyond that may be summarised as follows: if the action is allowed, the payment plan is reshaped; if it is dismissed, the schedule becomes final and the payment stage is reached. Until the court’s judgment becomes final, no payment may be made on the basis of the part of the schedule objected to (the case of a letter of guarantee being reserved).
In the result, actions for objection brought against the schedule have the capacity to affect the order and proportion of payment not of a single creditor but of all the creditors in the file. For that reason they stand out as an exceptionally important type of action from the point of view of enforcement law.
Independent Legal Assessment
The most common error encountered in disputes over ranking schedules is choosing the wrong avenue of application. Although the distinction between complaint and the action for objection may appear technical, its consequences are grave: an application made to the wrong forum leads to the expiry of the 7-day preclusive period and to the schedule becoming final. For that reason, when a file is examined, it must first be clarified whether the objection is directed at one’s own ranking or at the position of another creditor.
In examining the schedule, the classification of the claim is no less decisive than the time limit. Disputes as to the scope of a right of pledge, the basis of a public claim, or whether employment claims are to be regarded as privileged, will in most cases directly alter the share to be taken in the distribution.
In a particular file the following heads should be given priority:
- Documenting whether service was duly effected and on what date the period actually began to run
- Determining at the outset whether the objection targets one’s own ranking or the right of a third creditor
- Observing the difference in subject-matter jurisdiction between attachment proceedings and bankruptcy liquidation (Civil Court of First Instance – Commercial Court of First Instance)
- Preparing assertions of pledge, public claim and privilege together with the documents on which they rest
- Assessing the possibility of bringing payment forward by providing a letter of guarantee under Art. 142/a of the Enforcement and Bankruptcy Act No. 2004
- Reflecting in commercial planning the extended period of recovery resulting from the halting of distribution
Independent Legal provides advisory and litigation services throughout the process, from the examination of the ranking schedule in attachment and bankruptcy proceedings to the conduct of complaints and actions for objection.