SWITZERLAND Trends and Developments Contributed by: Thiemo Sturny, Dominik Hohler and Estelle Mathis, Walder Wyss Ltd
already overindebted and later asserts such loan as an ordinary third-class claim in bankruptcy, such conduct undermines the creditor’s legitimate reliance. This behaviour is contradictory and therefore constitutes an abuse of rights. However, subordination is not automatic. In practice, this means that subordination only applies where a loan is granted to a company already in a state of overindebtedness (Article 725b CO) and the share - holder subsequently insists on equal ranking with other third-class creditors in bankruptcy. No subordination for mere capital loss (Article 725a CO) If the most recent annual accounts indicate that the assets less the liabilities no longer cover half of the sum of the share capital, the statutory capital reserve not to be repaid to the shareholders and the statutory retained earnings (capital loss), the board of directors shall, according to Article 725a CO, take measures to rectify the capital loss. In addition, the most recent annual accounts must undergo a limited audit by a licensed auditor. According to the SFSC’s ruling, creditors cannot rely on the existence of subordination agreements in cases of mere capital loss. Loans granted by share - holders or other related parties in such circumstances are therefore treated on an equal footing with ordinary The SFSC further took the opportunity to reject several approaches that had been discussed in legal doctrine and cantonal jurisprudence. In particular, the following were held irrelevant for the purpose of determining whether a shareholder or related party loan should be subordinated in bankruptcy: • whether an independent third party would have granted the loan under the same conditions (the so called third-party test); • whether only an equity contribution could have achieved a restructuring effect; and • whether the loan was accompanied by other restructuring measures. third-class creditors’ claims. Rejection of alternative tests
No legislative gap Finally, the SFSC rejected the argument that subor - dination could further be derived from a legislative gap. It noted that the issue of shareholder loans had repeatedly been debated in Parliament, and proposals to implement such laws had been rejected. Against this background, the SFSC concluded that there is no basis for judicially filling legislative gaps. Practical implications This judgment provides significant guidance for prac - tice. For shareholders and related parties considering granting loans to financially distressed companies, the financial situation at the time of granting the loan must be carefully assessed. If the company is already overindebted at the time the loan is granted (Article 725b CO), there is now a substantial risk that such claim will be subordinated in later bankruptcy. By contrast, if the company has merely suffered a capital loss (Article 725a CO), there is no risk of subordination, according to this latest judgment. For members of the board of directors, however, the ruling has no direct impact. Members of the board of directors must continue to monitor the company’s financial situation and comply with their obligations under Article 725 et seqq CO in situations of financial distress. In particular, they must ensure that appropri - ate restructuring measures are initiated in due time and, where required, that the court is notified about the overindebtedness. The existence of shareholder or related party loans does not relieve the members of the board of directors of these obligations, unless such loans have been explicitly subordinated to the extent of the overindebtedness. Unresolved questions Although the SFSC’s ruling clarifies a long-debated issue, many practical questions still remain unan - swered and will require further clarification through future case law. In particular, the following open ques - tions have been highlighted by legal doctrine. Ex-post determination of overindebtedness Without further elaboration, the SFSC noted that overindebtedness may also be established ex-post.
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