Swiss Supreme Court limits the room for forced subordi-nation of shareholder loans

If a shareholder grants an unsubordinated loan to its company and the same later enters bankruptcy, the shareholder's claim for repayment of such loan ranks as equal with all other non-privileged and non-secured creditors.

A number of legal scholars consider it an abuse if a shareholder grants a loan when the company is already in financial distress and, in a later bankruptcy, reclaims such loan with the same ranking as other creditors. In the view of such scholars, the relevant shareholder loan should be treated as subordinated – against the will of the shareholder (equitable subordination). Differing criteria are offered in doctrine for when the granting of shareholder loans should be considered abusive and entail a forced subordination in bankruptcy: According to one view, a shareholder loan is tainted if an independent third party would no longer have granted the loan at such terms (arms' length test). Another opinion considers a shareholder loan to be compromised if it was granted at a time when only equity financing would have displayed recovering effect (restructuring test). According to a third view, a shareholder loan is only to be subordinated if it was granted while the company was already over-indebted; i.e. its assets no longer covered its liabilities.

With its decision of 31 March 2025 (5A_440/2024), the Swiss Federal Supreme Court ruled that a shareholder loan is only subject to forced subordination if it was granted while the company was already overindebted; it rejected other legal theories that seek to subordinate shareholder loans that were granted at an earlier stage of financial distress. According to the convincing reasoning of the court, when a company is over-indebted it must by law file for bankruptcy unless certain creditors subordinate their claims in the amount of the over-indebtedness. Creditors can therefore expect that active companies are not over-indebted (or sufficient claims have been subordinated). If a shareholder grants an unsubordinated loan to the company while it is over-indebted (and therefore usually in breach of its obligation to file for bankruptcy), it would appear inequitable for the shareholder to rank equally with other creditors in a later bankruptcy. However, no justification exists to extend the scope of such a forced subordination.

This decision is welcome as it grants legal certainty regarding the treatment of shareholder loans in bankruptcy and, by limiting the room for forced subordination, facilitates the granting of liquidity to companies in distress and possible restructurings.