The underlying rationale for this can be summarised as follows: from an economic perspective, the loan does not truly constitute a loan if and to the extent that the company could not have obtained the financing from a third party on equivalent terms. This financing would create the illusion of the company's solvency and capacity to meet its obligations, which would in fact not be true and would simply delay its inevitable exclusion from the market through bankruptcy. This would result in a deterioration of the interests of ordinary third-class creditors, who are ranked equally with the related lender, as it would reduce their expected bankruptcy proceeds.

Various corrective measures have been formulated and, in some cases, applied by cantonal courts, namely the reclassification of the loan as equity and the forced subordination of the loan to all other claims. Irrespective of the type of corrective measure applied, the economic outcome is inevitably the same: the creditor lending to the company is only reimbursed after all other creditors (three rankings in Switzerland) have been paid in full. However, It should be noted that the implementation of such measures by cantonal courts was not based on an explicit legal basis but on general legal principles (in particular the principles of trust and the prohibition of abuse of rights).

The Federal Supreme Court of Switzerland had previously ruled against the reclassification of shareholder loans as equity in such circumstances in three separate judgments delivered in 2006 and 2011, considering the concept as contrary to the principles of Swiss corporate law.

In a recent landmark decision, namely 5A_440/2024 of 31 March 2025, the Federal Court ruled on the validity of a forced subordination decided as a corrective measure by the creditors' supervisory committee in the context of the collocation of claims arising from loans granted by related parties (i.e. members of the board of directors and shareholders) to a company in financial distress, which was ultimately declared bankrupt. The subordination was based on the prohibition of abuse of a right (Art. 2 CC). The over-indebtedness at the time the loans were granted had however not been substantiated (Art. 725b CO/ 725 para. 2 aCO).

In this particular instance, the Federal Court ruled in favour of the lenders whose claims had, according to the Federal Court, been wrongly subordinated.

The Federal Supreme Court considered over-indebtedness (i.e. liabilities are greater than assets, Art. 725b CO/ 725 para. 2 aCO) as the main criterion to justify forced subordination, thereby upholding the views of certain Swiss scholars based on the principle of trust. In a situation of over-indebtedness, the board of directors has the duty to file for bankruptcy with the court; the board of directors is released from such obligation if creditors agree to subordinate their claims to the extent of the over-indebtedness. Creditors can therefore rely on the fact that a company involved in legal relationships is not over-indebted, or that sufficient subordination agreements have been entered into to cover the amount of the over-indebtedness.This is the sole legal basis which provides protection to creditors who place confidence in a company they wrongly believe to be financially healthy. As long as a company is not over-indebted at the time the loan is granted by a related party, the loan itself and the subsequent filing of the claim for third-class ranking in the schedule of claims do not, a priori, constitute an obvious abuse of rights.

It should also finally be noted that the Federal Court does not preclude the possibility of a subordination of claims being validly agreed upon by conclusive acts. However, it reiterated that in order to be able to conclude that subordination has been agreed upon through conclusive acts (or even implicitly), the contract – of which the content is determined by the genuine and mutual will of the parties – must be interpreted using a subjective or empirical method of interpretation.

In 2008, the Federal Court issued a significant ruling on the criteria for categorising a loan as a 'restructuring loan,' which, if repaid prior to bankruptcy, would not be subject to claw-back actions (ATF 134 III 452). The Federal Supreme Court has now established a framework for the treatment in bankruptcy – or a scheme of arrangement with creditors – of claims arising from loan agreements concluded by a related party (in particular a shareholder) with a company in financial distress.

The key elements of this ruling can be summarised as follows:

• A related party – specifically a shareholder – must ascertain whether the company is over-indebted at the time the loan is granted. The forced subordination of a loan to a related party may only occur in exceptional circumstances, in particular if there is an over-indebtedness.
• The fact that the shareholder is potentially also a member of the board of directors will naturally have an impact on a dispute over repayment in bankruptcy proceedings. Indeed, given that, by law, the board of directors that suspects a situation of over-indebtedness is required to have an audited balance sheet prepared (based on going concern and liquidation values), the shareholder could not in good faith claim that the company's financial distress was not fully known to them at the time the loan was granted.
• The board of directors must fulfil its various obligations expeditiously in order to prevent or remedy a situation of insolvency, capital loss and over-indebtedness. While insolvency and capital loss may not necessarily mislead creditors to the extent where they can invoke a violation of the principle of trust, they entail crucial obligations for the board of directors.
• It is evident that even if the conclusion of a subordination agreement is considered to be a contract, its implicit or tacit nature should remain the exception. In any event, the statutory or certified auditor tasked with auditing the interim financial statements to verify the existence of an over-indebtedness will not be satisfied with a subordination agreement that is not documented in writing.
• Particular attention should be paid to the issue of self-contracting. It is crucial to consider the terms and conditions of the loan, with particular reference to the interest rate (issues that were not addressed in the judgment analysed in the present newsflash).