SWITZERLAND Trends and Developments Contributed by: Thiemo Sturny, Dominik Hohler and Estelle Mathis, Walder Wyss Ltd
The problem of shareholder and related-party loans Loans granted by shareholders or other related parties to companies in financial distress have long been a source of controversy. Unlike external creditors, share - holders assume a dual role. They are equity investors and may have significant influence on the company’s decision-making. At the same time, they may act as lenders, providing funds in the form of debt. This dual role leads to conflicts of interest in bankrupt - cy proceedings, and legal scholars have long argued that such arrangements distort incentives. Rather than promoting a timely restructuring, shareholders and related parties may enable companies with no realistic prospect of long-term viability to continue operating their businesses. Losses accumulate, creditors’ posi - tions deteriorate, and shareholders and related parties remain positioned to compete with those third-party creditors if bankruptcy ultimately follows. Moreover, shareholders and related parties typically enjoy an informational advantage. They often possess superior knowledge of the company’s financial situ - ation compared to third-party creditors. By providing funds as loan rather than equity, shareholders or relat - ed parties may strengthen their position in bankruptcy – potentially at the expense of third-party creditors if their claims are not subordinated. This perceived disadvantage gave rise to compet - ing theories in Swiss doctrine and cantonal case law. Two solutions dominated the debate. Some scholars argued that shareholder loans should be reclassified as equity contributions when granted in times of finan - cial distress. Others favoured their subordination in bankruptcy, meaning that such claims would rank only after those of third-party creditors. The SFSC’s decision The SFSC conducted a comprehensive analysis of academic doctrine and divergent approaches adopted in cantonal jurisprudence. The SFSC’s reasoning may be summarised in the following key considerations: No recharacterisation as equity In line with its previous case law, the SFSC declined to recharacterise shareholder loans as equity contri -
butions, holding that such an approach is foreign to Swiss law. Claims arising from shareholder loans must always be treated as debt and – subject to the excep - tions outlined below – rank equally with the claims of other creditors. Contractual subordination (express, implied or tacit) The ruling established that subordination typically arises if it has been contractually agreed between the company and its creditor. Such agreement may be established expressly, implicitly or tacitly from the actual or presumed intention of the parties pursuant to Article 18 para. 1 CO and must be determined in accordance with the rules of contractual interpreta - tion. In the absence of an express agreement, however, it is generally to be assumed that the parties did not intend to subordinate their claims, without prejudice While the SFSC rejected recharacterisation as equity contributions, it confirmed that shareholder loans may, in exceptional circumstances, be subordinated on the basis of the doctrine of abuse of rights, particularly under the principle of venire contra factum proprium (prohibition of contrary conduct). The SFSC reasoned that third-party creditors are entitled to rely on the statutory framework governing overindebtedness (Article 725b CO). This provision requires the board of directors, where there is justified concern that the company’s liabilities are no longer covered by its assets, to prepare interim accounts and have them audited without delay. If those interim accounts confirm that the company is overindebted, the board must notify the court. However, such noti - fication is not required if, inter alia, the company’s creditors have subordinated their claims to those of all other creditors to the extent of the overindebtedness. Bona fide third-party creditors may therefore legiti - mately assume either that a company is not overind - ebted or, if it is, that sufficient subordination agree - ments are in place to cover the shortfall. Where a shareholder nevertheless grants a loan to a company to cases of abuse of rights (see below). Subordination in cases of abuse of rights (Rechtsmissbrauch)
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