In its recently published decision 5A_440/2024, the Federal Supreme Court clarified the aforementioned questions further (albeit not conclusively). The decision concerned the construction company F. AG, which had received several loans from its shareholders and board members between 2016 and 2018. At the time these loans were granted, F. AG was already in a precarious financial situation. The bankruptcy of F. AG posed a serious risk from the end of 2016 and was eventually opened in 2018. As a result of the cantonal proceedings, the loan claims were classified as subordinated. The Federal Supreme Court upheld an appeal in this regard and revoked the classification as subordinated claims. In this decision, it clarified for the first time which prerequisites must at least be met for shareholder loans to be classified as subordinated in bankruptcy.
Shareholder loans can be classified as subordinated in bankruptcy if the company was over-indebted at the time the loan was granted
The Federal Supreme Court confirmed the case law according to which Swiss law does not provide a basis for reclassifying (shareholder) loans as equity. In principle, shareholder loans are therefore to be treated in the same class as other creditors' claims in bankruptcy (subject to privileged claims, i.e., pari passu with claims of the so-called third class).
However, according to the Federal Supreme Court, a classification as subordinated claims in the company's bankruptcy may be considered in exceptional cases on the basis of the prohibition of abuse of rights, namely the prohibition of contradictory behavior (venire contra factum proprium).
This requires, first of all, a legitimate expectation of third parties. The Federal Supreme Court recognized a potential basis for such legitimate expectation in the statutory provision on over-indebtedness: In the opinion of the Federal Supreme Court, third-party creditors may legitimately assume that the company is not over-indebted or that claims in (at least) the amount of the over-indebtedness have been subordinated.
Furthermore, it is required that such legitimate expectation is disappointed. The disappointment of a legitimate expectation lies in the shareholder's filing of the loan claim as a third-class claim in the company's bankruptcy.
In summary, according to the Federal Supreme Court, contradictory behavior may therefore exist if (i) a shareholder or a related person grants a loan while that company is already over-indebted, and (ii) the shareholder files its loan claim as a third-class claim in the company's bankruptcy. In such case, it is conceivable that the shareholder loan may be classified as subordinated in the company's bankruptcy.
No classification of shareholder loans as subordinated claims in other cases
The Federal Supreme Court clarified that third parties can only have a legitimate expectation that a distressed company is not over-indebted. Accordingly, if a loan is granted at a time when the company has only suffered a (50%) loss of capital (but is not (yet) over-indebted), there is no basis to assume an abuse of rights. The view discussed in legal doctrine that such shareholder loans should also be classified as subordinated in bankruptcy was thus rejected.
Other triggers for the classification of shareholder loans as subordinated claims in bankruptcy were also rejected. According to the Federal Supreme Court, it was irrelevant whether an independent third party would still have granted such a loan (third-party test), whether only an equity contribution could have had a restructuring effect at the time the loan was granted (restructuring test), or whether further restructuring measures were initiated together with the granting of the loan.
The Federal Supreme Court also examined whether there could be an implicit (tacit) contractual subordination. The Federal Supreme Court clarified that clear indications in the contractual agreement between the parties would be required for such an assumption. In particular, one could expect a borrower to raise the issue of a subordination if such subordination is considered relevant. In the absence of such indications, no contractual subordination could be assumed, either explicitly or tacitly.
Furthermore, the Federal Supreme Court rejected the argument that (further) classification of shareholder loans as subordinated claims was based on a statutory gap. Respective legislative proposals were repeatedly discussed, but rejected, in parliament.
Practical consequences of the decision
The decision of the Federal Supreme Court to some degree increases legal certainty regarding the treatment of loans from related parties in bankruptcy. It clarifies that (i) a (tacit) contractual subordination must be based on clear indications in the parties' declarations, and (ii) classification of shareholder loans as subordinated claims in bankruptcy by operation of law (abuse of rights) is only conceivable if, in particular, the company was already overindebted when the loan was granted.
Shareholders and related parties who wish to grant loans to a distressed company would be well advised to carefully examine the financial situation (possible over-indebtedness) in order to assess the risk of classification as subordinated claims in the event of bankruptcy. It is also advisable to expressly address any contractual subordination (or the absence thereof).
From the perspective of the members of the board of directors, compliance with legal obligations in times of financial distress (such as imminent insolvency, capital loss, over-indebtedness) is of central importance, regardless of the Federal Supreme Court decision. Particularly important is the initiation of appropriate restructuring measures.
Open questions
Is the Federal Supreme Court's decision applicable if the latest available balance sheet does not show an over-indebtedness, but such over-indebtedness is established retroactively?
It remains unclear whether the classification of shareholder loans as subordinated claims also applies if the last available balance sheet at the time the loan was granted does not show any over-indebtedness, but such over-indebtedness is subsequently established retroactively (by a court). Such retroactive establishment of an over-indebtedness may occur if the last available balance sheet is out of date or needs to be corrected, for example because individual assets needed to be written down or because a valuation at liquidation values rather than going-concern values would have been appropriate due to a lack of going concern.
Although the Federal Supreme Court did not discuss this issue in depth, it mentioned in passing that over-indebtedness can also be determined retroactively. In our view, the legal basis applied by the Federal Supreme Court for prohibiting contradictory behavior requires that the lender is aware, or should be aware, of the over-indebtedness at the time the loan is granted.
Is the Federal Supreme Court's decision applicable in relation to shareholder loans granted during the grace period of up to 90 days foreseen in art. 725b CO?
In the opinion of the Federal Supreme Court, the legitimate expectation is based on former art. 725 CO (which largely corresponds to art. 725b CO), according to which the directors of an over-indebted company must notify the court (whereupon bankruptcy proceedings are usually initiated), unless sufficient claims against the company have been subordinated. However, based on former art. 725 CO as well as based on art. 725b CO, a notification may also be omitted if there is a reasonable prospect that the over-indebtedness can be remedied within a reasonable period (pursuant to art. 725b CO: maximum 90 days).
The Federal Supreme Court's decision does not address how to deal with shareholder loans granted during such a grace period. In our opinion, such shareholder loans should not be classified as subordinated in consistent application of the principle of "legitimate expectations". However, this would also mean that the conditions for subordinating shareholder loans in bankruptcy would be somewhat blurred compared to a purely balance sheet test.
Has the Federal Supreme Court's decision a bearing on the application of art. 725b CO?
Furthermore, the Federal Supreme Court decision does not contain any specific guidance on the question of whether shareholder loans that are to be classified as subordinated in bankruptcy proceedings may, also prior to the opening of bankruptcy proceedings be considered as liabilities subject to subordination in the sense of art. 725b CO (also in the balance sheet). In such case, the notification of the court could be waived, irrespective of the over-indebtedness, provided that the liabilities which are (deemed) subordinated correspond to at least the negative equity.
In our opinion, the Federal Supreme Court decision only concerns the classification of shareholder loans in bankruptcy. Such treatment does not mean that such shareholder loans granted without express subordination at the time of over-indebtedness are to be treated as equivalent to a (shareholder) loan with contractual subordination outside of bankruptcy proceedings (consideration 5.4 of the Federal Supreme Court decision also seems to indicate such distinction). Consequently, notification of the court could not be omitted on the basis of such shareholder loans.
What impact, if any, does the Federal Supreme Court's decision have on directors' liability?
The above is tied to questions of directors' liability: If bankruptcy proceedings are opened against a company, members of the board of directors who have not (timely) fulfilled their duty to notify the court of the company's over-indebtedness may be held liable for the damage caused by such delay. As part of the revision of Swiss corporate law, it was clarified that claims subject to (contractual) subordination are not to be taken into account when calculating such damages. It is not clear whether this also applies to shareholder loans that are classified as subordinated due to the prohibition of abuse of rights in bankruptcy (but are not subject to contractual subordination).
