Loans In Times Of Crisis: Between Hopes For Restructuring And Subordination

Shareholder and third-party loans are central to Swiss corporate practice, particularly when companies face financial difficulties. Shareholders, board members, or related parties often grant loans to distressed companies to ensure their survival. This practice, however, raises complex legal questions that have frequently occupied the Federal Supreme Court. The key issue is under what conditions such loans are subordinated in bankruptcy or even reclassified as equity substitutes. The Federal Supreme Court decision 5A_440/2024, published in March 2025, provides important clarifications and specifies the legal situation.

The second part of this article addresses restructuring loans and their special status in avoidance actions, focusing on the landmark decisions BGE 134 III 452 and 5A_671/2018.

Finally, this article examines the broader connections between shareholder loans and restructuring loans.

Part 1: Shareholder loans and subordination in bankruptcy

A. The core conflict

Shareholder loans are a common and flexible corporate financing tool, often offering more favourable terms than bank loans. However, they also carry a significant risk of abuse. For instance, a shareholder loan might allow a financially distressed company to continue operating without a realistic chance of recovery, thereby disadvantaging other creditors in a subsequent bankruptcy.

Swiss law generally does not permit reclassifying shareholder loans as equity, a practice the Federal Supreme Court has consistently rejected, unlike the German model. Nevertheless, the question has arisen in doctrine and practice as to whether and under what conditions shareholder loans should be subordinated in bankruptcy, meaning they would be repaid only after satisfying all other creditors.

B. Decision 5A_440/2024: A Landmark Ruling

On 31 March 2025, in a landmark decision (case 5A_440/2024), for the first time the Federal Supreme Court established clear criteria for the subordination of shareholder loans. The case involved F AG Bauunternehmung, which had received several loans from its shareholders and board members between 2016 and 2018. After the company entered bankruptcy in April 2018, the related creditors filed their loan claims for collocation. The cantonal authorities collocated these claims as subordinate, placing them behind other third-class claims.

The Federal Supreme Court overturned this collocation and upheld the creditors' appeal. In its detailed reasoning, the court first noted that Swiss law provides no basis for reclassifying shareholder loans as equity. Therefore, such loans must, in principle, be treated equally with other creditor claims in bankruptcy, subject only to privileged first and second-class claims.

C. The prohibition of abuse of rights as a reference point

However, the Federal Supreme Court recognised that, in exceptional cases, the prohibition of abuse of rights may justify subordinate collocation. Specifically, the prohibition of contradictory behaviour (venire contra factum proprium) may apply. According to case law, this requires two conditions to be met.

First, third parties must have a legitimate reliance. The Federal Supreme Court based this reliance on the statutory provision on over-indebtedness under Art. 725b of the Swiss Code of Obligations (CO). This provision allows third-party creditors to legitimately assume that a company participating in legal transactions is not over-indebted. If a company is over-indebted, its board of directors must either notify the court to initiate bankruptcy proceedings or ensure subordination agreements cover the shortfall. The Federal Supreme Court clarified that while other provisions like Art. 725a para. 1 CO (capital loss) also impose obligations on the board, they do not create a legitimate expectation for creditors that at least half of the share capital is covered. Therefore, only over-indebtedness, as a form of material insolvency, serves as the decisive reference point.

Secondly, the shareholder's legitimate expectation must have been frustrated. This occurs when the shareholder registers their loan as a third-class claim of equal rank in the company's bankruptcy, despite the company already being over-indebted when the loan was granted. The Federal Court considers this behaviour contradictory: the shareholder provides a loan to an over-indebted company where a capital contribution would have been appropriate, only to later assert the claim in bankruptcy on equal footing with other creditors.

D. The central importance of over-indebtedness

Decision 5A_440/2024 clarifies that over-indebtedness at the time of granting the loan is the decisive criterion. As long as a company is not over-indebted, granting a loan and subsequently asserting the claim in bankruptcy is not a clear abuse of law. The Federal Supreme Court emphasised that, apart from over-indebtedness, there is no legal basis for creditors' legitimate expectations.

This ruling has considerable practical significance. It means that even if a loan fails the so-called third-party or restructuring tests – meaning an independent third party would not have granted it or it was granted when only a capital contribution would have had a restructuring effect – subordination will not occur as long as there was no over-indebtedness. These tests, long discussed in legal doctrine as criteria for capital-replacing loans, are irrelevant under this new case law.

The Federal Supreme Court also rejected the argument that the lenders' behaviour could imply a tacit subordination. It clarified that a court can only consider implied subordination if the parties' statements indicate such a presumed intention.

A subordination agreement is a unilateral declaration by a creditor to subordinate their claims to those of all other creditors in the event of bankruptcy, insolvency, or liquidation. It cannot be assumed that a lender will agree to such a subordination agreement to its own detriment and in favour of third parties without clear indications. The mere fact that a shareholder grants a loan to its distressed company is insufficient to imply a subordination agreement.

E. Proof of over-indebtedness

The Federal Supreme Court clarified that a company's over-indebtedness at the time a loan was granted can be determined retrospectively, even if the company failed in its duty to pre-pare an interim balance sheet. However, the party asserting the subordination, typically the bankruptcy administration or other creditors, bears the burden of proving over-indebtedness.

In the absence of a corresponding interim balance sheet, it must therefore be calculated, based on the asset status at the time of the opening of bankruptcy proceedings, by taking into account all bookings made between the time the loan was granted and the opening of bankruptcy proceedings, whether the company was already over-indebted at that time, whereby liquidation values are to be applied. If there were claims with subordination at the time the loan was granted, these are not to be included in the calculation of the asset status (Art. 757 para. 4 CO in conjunction with Art. 725b para. 4 no. 1 CO).

F. Practical consequences

The Federal Supreme Court's decision 5A_440/2024 has significant practical consequences. It provides shareholders and related parties with legal certainty: they can assume that a loan granted to a company that is not over-indebted will not be subordinated in a subsequent bankruptcy. This holds true even if an independent third party would not have granted the loan or if only a capital contribution would have had a restructuring effect.

At the same time, the ruling serves as a clear warning: shareholders who grant a loan to an already over-indebted company and later assert this claim in bankruptcy proceedings on par with other creditors risk its subordination based on an abuse of rights.

G. Unresolved issues

It is unclear whether this case law also applies to third-party loans. On the one hand, it is doubtful that the Federal Supreme Court would apply Art. 725b para. 3 CO to third parties, as the wording of this provision is not even addressed to shareholders, but solely to the board of directors. On the other hand, it is questionable whether third parties could even recognise over-indebtedness in a specific case. However, it cannot be ruled out that a third party might recognise the over-indebtedness and still grant a loan that, contrary to their assessment, fails to meet the Federal Supreme Court's requirements for a restructuring loan (more on this below).

As mentioned in the introduction, Part 2 of this article will therefore examine restructuring loans before concluding with a discussion of the broader connections between shareholder and restructuring loans.

Part 2: Reorganisation loans and Paulian avoidance

A. Introduction

When a creditor grants a loan to a financially distressed company to enable its restructuring, the question arises whether the repayment of this loan before the opening of subsequent bankruptcy proceedings can be contested.

Under the general principle of contestation law in Art. 288 of the Swiss Debt Enforcement and Bankruptcy Act (DEBA), a debtor's legal acts performed within the five years preceding the opening of bankruptcy proceedings are contestable if the debtor intended to disadvantage other creditors and this intention was known or should have been apparent to the other party.

The Federal Supreme Court has established that the repayment of a loan is not the consideration for its granting, but rather the fulfilment of the obligation to repay, which was established when the loan was taken out. Consequently, the repayment of a loan generally constitutes a contestable legal act, as it diminishes the bankruptcy estate.

However, the Federal Supreme Court has carved out a significant exception in its case law: under specific conditions, the granting and repayment of a loan are to be treated as a single, non-contestable transaction. This jurisprudence serves the vital purpose of facilitating restructuring efforts and protecting creditors who support a debtor in crisis.

B. BGE 134 III 452: The SAirGroup decision

The Federal Supreme Court's landmark decision on restructuring loans is BGE 134 III 452, dating from 2008. This ruling concerned the repayment of a loan to Zürcher Kantonalbank (ZKB) by SAirGroup in the final months preceding the infamous grounding in October 2001. The bankruptcy administration of SAirGroup challenged this repayment through a Paulian action for avoidance.

In this case, the Federal Supreme Court affirmed the contestability and upheld the action. In its comprehensive reasoning, the Court first established the general principles of Paulian avoidance, particularly addressing the intention to cause damage and its recognisability. The Court clarified that these subjective elements should not be interpreted too strictly. When a debtor repays individual creditors while their insolvency is foreseeable, one can generally presume an intention to disadvantage other creditors and that this intention was recognisable.

The decisive part of the ruling addressed whether the loan repayment qualified for exemption from contestation as a restructuring loan. For this, the Federal Supreme Court developed a three-stage test, requiring three cumulative conditions to be met for a loan to be classified as a contestation-resistant restructuring loan.

First, the financially distressed debtor must make a genuine restructuring effort. Merely continuing market operations and hoping for improvement is insufficient. Instead, the debtor must take concrete restructuring measures aimed at overcoming the financial difficulties.

Second, the restructuring efforts must appear promising. There must be a justified hope for a favourable prognosis regarding the debtor's financial development. The assessment is made ex ante, focusing on the time the loan was granted or repaid, not on the actual subsequent events. The ultimate failure of a restructuring does not preclude its classification as a restructuring loan, provided it appeared promising ex ante.

Thirdly, the loan must have been granted for restructuring purposes and thus in the interest of the other creditors. This is the crucial point: a loan is only exempt from contestation if its primary purpose is to restructure the debtor and thereby satisfy all creditors, rather than to serve the lender's own interests. This specific reason for the repayment obligation negates any presumed intention by the debtor to favor the lender and the lender's awareness thereof.

In the specific case of the SAirGroup ruling, the Federal Supreme Court denied the existence of a restructuring loan. In March 2001, ZKB granted SAirGroup a CHF 250 million loan with an extension option. In July 2001, the parties agreed that ZKB would not be a 'key relation-ship bank' and that its loan should be repaid. SAirGroup subsequently repaid the loan.

The Federal Supreme Court concluded that the loan repayment was not part of a restructuring. It found that ZKB's primary concern was equal treatment with other lenders, seeking information and repayment before other banks. SAirGroup had also developed an accelerated debt repayment program to repay unsecured debts to non-primary lenders in the medium term. This demonstrated that the main objective was not the company's restructuring for the benefit of all creditors, but the preferential repayment of individual creditors.

C. BGer 5A_671/2018: Standstill agreement and restructuring loan

Another key ruling on restructuring loans is judgment 5A_671/2018 from 2020. This case addressed a standstill agreement with banks and whether extending loans under such an agreement constitutes a restructuring loan.

The facts were as follows: A. AG, facing financial difficulties, concluded a standstill agreement with its banks. The banks agreed not to terminate loans, to maintain limited credit lines, and to defer due claims. In return, A. AG provided certain assurances and undertook obligations, notably to sell essential operating assets in an asset deal and use the proceeds to repay the loans and satisfy all other creditors.

In December 2011, the banks extended the standstill agreement and the credit lines, agreeing to a subordination for the new credit limit granted until the end of June 2012. In the subsequent months, A. AG repaid approximately 90 per cent of the loans. In August 2012, bankruptcy proceedings were opened against A. AG. The bankruptcy administration challenged the loan repayments through a Paulian action.

The Federal Supreme Court dismissed the action for annulment, confirming the lower court's judgment. It first established that under a standstill agreement, which is the most common form of restructuring assistance, lending banks commit to maintaining their credit exposure. Extending a previously granted loan can also be considered a restructuring loan if the restructuring intention is clear and the lender's behaviour—through special services, concessions, or direct support—differs from that of an ordinary lender.

In this case, the Federal Supreme Court ruled that the lower court correctly based its decision on the creditors' perspective when determining if a loan served a restructuring purpose and was thus not contestable. The special treatment for granting and repaying such a loan is justified because it serves the interests of all creditors, not just the lender. A restructuring context that excludes contestation exists when the intended restructuring aims to satisfy all creditors in full, thereby averting bankruptcy or composition proceedings.

The Federal Supreme Court examined whether the three conditions for a restructuring loan, as defined in BGE 134 III 452, were met. With regard to the restructuring efforts, it found that A. AG had pursued a concrete restructuring concept based on an asset deal with subsequent continuation for the completion of the remaining orders. Concerning the prospects of success, the court found that at the time of the agreement in December 2011, there were justified hopes for a favourable prognosis. The ultimate failure of the plan is irrelevant under contestability law.

The Court's analysis of the third requirement—whether the loan was granted for restructuring purposes and in the interest of other creditors—is particularly insightful. The appellant argued that extending the standstill agreement was not a genuine concession but served the banks' own interest in selling the business to repay their loans.

The Federal Supreme Court rejected this argument, finding that the cantonal court has discretion in assessing the nature and weight of the required special performance based on the specific circumstances. The lower court's determination that the banks' extension of the standstill agreement and credit limits constituted a genuine concession and thus a sufficient special service was not a violation of the law. This holds true despite the repayment of ap-proximately 90 per cent of the loans within two months and the subordination of the new credit limit granted until the end of June 2012.

The case also demonstrated that the concept of restructuring relevant to a legal challenge is not equivalent to the concept of restructuring under accounting law (Art. 725b CO). There-fore, it was not detrimental that the restructuring plan provided for the sale of the entire business and the company's ultimate liquidation. The decisive factor was that the sale of the business and the completion of remaining orders were intended to satisfy all creditors in full.

D. Distinction from the SAirGroup case

A comparison between BGE 134 III 452 (SAirGroup) and BGer 5A_671/2018 illustrates the challenge of distinguishing contestable preferential treatment of creditors from non-contestable restructuring loans. Both cases involved extending or repaying loans to a company in financial distress. The Federal Supreme Court affirmed contestability in the SAirGroup case but denied it in the latter.

The key distinction lies in the third requirement for a restructuring loan. In the SAirGroup case, the objective was not to restructure the company for the benefit of all creditors, but rather to preferentially repay individual creditors. Specifically, SAirGroup intended to repay unsecured debts to banks that were not its main medium-term lenders. In the second case, however, the loans were part of a comprehensive restructuring plan designed to ensure the company's continued operation and satisfy all creditors.

This distinction demonstrates that a holistic assessment of all circumstances is crucial. The decisive factor is whether the lender's primary motive for granting the loan is to restructure the debtor's business or to improve its own position. Answering this question is often difficult in specific cases, affording the courts considerable discretion.

The significance of the new restructuring law

In both decisions, the Federal Supreme Court noted that the new restructuring law, effective 1 January 2014, does not expressly regulate restructuring loans. During the legislative revision, an expert group initially considered legally defining the conditions for subordinating such loans. However, the group ultimately refrained from proposing a corresponding regulation.

The legislature thus deliberately chose not to regulate restructuring loans by statute. This does not mean the concept is absent from Swiss law. Instead, it originates from Federal Supreme Court case law as an exception to the principle of contesting creditor preference. This lack of statutory regulation means that the courts must continue to develop the conditions and legal consequences of restructuring loans, which creates a degree of legal uncertainty.

Summary and outlook

Recent case law has significantly developed the principles governing shareholder loans. Decision 5A_440/2024 of March 2025 established, for the first time, clear criteria for subordinating such loans. The decisive factor is whether the company was already over-indebted when the loan was granted. Only then can a court consider subordination based on an abuse of rights. While this clarification provides greater legal certainty, it also raises new questions, particularly on how to determine over-indebtedness in specific cases.

The jurisprudence on restructuring loans, notably BGE 134 III 452 and BGer 5A_671/2018, highlights the challenge of distinguishing between voidable creditor preference and permissible restructuring contributions. The three cumulative conditions—restructuring efforts, prospects of success, and a genuine restructuring purpose—must all be met. Applying these criteria grants courts considerable discretion in individual cases.

The topics of subordinate ranking of shareholder loans and restructuring loans are closely linked. Both concern loans granted to a company in financial distress. Following established case law, restructuring loans should be facilitated and encouraged. If the relevant conditions are not met, however, shareholder loans are subordinated.

Practical recommendations

Various practical recommendations can be derived from case law on restructuring loans. Creditors intending to grant a new loan to a debtor in financial difficulty, or to extend an existing one, must consider three key conditions for a valid restructuring loan.

First, the debtor must take concrete restructuring measures. Merely waiting for an improved economic situation is insufficient. We recommend creating a written restructuring plan that details the planned measures and their implementation timeline.

Second, creditors must analyze the restructuring's prospects of success. An independent re-structuring consultant or auditor, for example, can perform this analysis. It is crucial to conduct and document this assessment ex ante, i.e., at the time of granting the loan. Courts will critically view any retrospective justification after a restructuring has failed.

Third, the loan must be clearly granted for restructuring purposes and in the interest of all creditors. A standstill agreement involving multiple creditors, which aims for a comprehensive restructuring solution, can demonstrate this. Creditors must avoid creating the impression that the loan preferentially treats individual creditors.

Only then can they be confident that a subsequent repayment cannot be contested.

Conversely, this approach avoids subordinate treatment if the company enters bankruptcy and no repayment occurs. Excluding repayments of genuine restructuring loans from a Paulian challenge implies that such loans are not subject to subordination. It would be inconsistent to deem these claims subordinate in bankruptcy while simultaneously permitting their repayment despite the company's financial distress.

The case law on shareholder and restructuring loans will continue to evolve. The Federal Supreme Court is expected to clarify the criteria for subordinating shareholder loans and the requirements for restructuring loans in future decisions. This will require balancing creditor protection with the promotion of restructuring efforts. Developments in this area therefore warrant close attention.

This makes it all the more important to obtain expert legal advice on shareholder loans in crisis situations and restructuring loans, even when time is of the essence. Our insolvency law team will provide you with comprehensive and competent advice.

The cited decisions are available here:

• BGE 134 III 452
• 5A_671/2018
• 5A_440/2024