<h3>Leading decision of the Federal Supreme Court on equitable subordination provides clarity for loans in distressed situations</h3>
<h3>1. Introduction</h3>
When shareholders and other related parties grant loans to a company in financial distress to bridge an acute liquidity shortfall, the question frequently arises as to whether such distressed loans should rank pari passu with the claims of other creditors in the event of a failed restructuring and subsequent bankruptcy. In cantonal case law and legal doctrine, this has occasionally been affirmed under the concepts of &#171;equity-replacing loan (eigenkapitalersetzendes Darlehen)&#187; and &#171;equitable&#187; or &#171;implied subordination.&#187;
In a recent landmark decision (5A_440/2024 dated March 31, 2025), the Federal Supreme Court confirmed that unsecured loan claims of related parties are generally to be treated as unsecured third-party claims under Swiss law &#8211; namely (after the privileged creditors of the first and second classes) in the so-called third class. Only in exceptional cases involving an obvious abuse of rights are claims of related parties to be equitably subordinated to those of other creditors. A key prerequisite for such abuse is, in particular, that the company was overindebted at the time the loan was granted.
<h3>2. Facts of the Case</h3>
In the present matter, shareholders and members of the Board of Directors of the construction company F. AG provided loans between 2016 and 2018, despite being aware of the company’s precarious financial situation. F. AG consistently reported negative operating results from 2011 to 2017.
According to the decision, F. AG suffered from significant liquidity issues, and &#171;from the end of 2016, the company’s bankruptcy was a serious risk.&#187; Third parties were no longer willing to provide financing. However, at the time the loans were granted, the company was not yet balance-sheet overindebted.
In June 2015, F. AG also transferred assets to A. AG, a company related to its shareholders. Bankruptcy proceedings for F. AG were opened on April 30, 2018. The unsecured loans in question were recorded in the bankruptcy proceedings as &#171;subordinated third-class claims.&#187; The bankruptcy administration justified this classification on the grounds that the loans had been granted in abuse of rights – specifically, to artificially prolong F. AG’s business activities and thereby postpone the timeframe for initiating a clawback action (actio pauliana) concerning the transfer of assets to A. AG.
The lower court upheld the equitable subordination of these loans as claims ranking behind all other third-class claims.
<h3>3. Decision and Considerations</h3>
The Federal Supreme Court overturned the lower court’s decision and ordered that the loans be classified as third-class claims without subordination to other unsecured creditors.
Swiss law does not contain an explicit legal basis for reclassifying loans as equity. The Federal Supreme Court reaffirmed its established case law, confirming that such reclassification lacks legal basis.
For the first time, however, the Federal Supreme Court explicitly outlined the conditions under which the equitable subordination of claims from related parties may be considered, citing the following exceptional cases:
<ul>
<li>Abuse of Rights: 
Subordination is permissible if asserting the claim constitutes an obvious abuse of rights (Art. 2 para. 2 of the Swiss Civil Code). This requires a legitimate expectation on the part of other creditors that the related party failed by asserting the claim unencumbered. Such trust arises only under Art. 725 para. 2 of the former Swiss Code of Obligations (Art. 725b para 4 of the current Swiss Code of Obligations), which stipulates that a company could continue its operations despite balance-sheet over-indebtedness only if subordinations existed to cover the over-indebtedness. 
The Federal Supreme Court therefore held that over-indebtedness at the time of the loan is an objective prerequisite for an obvious abuse of rights. The Court endorsed the lower court’s reasoning on this point. Although the Federal Supreme Court did not explicitly address subjective factors, it is clear from the decision that the shareholders were aware of the company’s distressed situation.</li>
<li>Express, Implicit, or Implied Subordination: 
Subordination is also possible where it has been contractually agreed – whether expressly, implicitly, or by implication &#8211; based on the actual or presumed intention of the related party and the company (Art. 18 para. 1 of the Swiss Code of Obligations), determined through standard contract interpretation principles. In the absence of an express agreement, it must generally be assumed that related parties do not intend to subordinate their claims, as was the case here.</li>
</ul>
The Federal Supreme Court also rejected several alternative tests for abuse of rights that have been discussed in doctrine and lower court decisions:
<ul>
<li>No Third-Party Test: 
Whether an independent third party would have granted the loan on the same terms is irrelevant.</li>
<li>No Restructuring Test: 
It is also irrelevant whether the loan was granted at a time when only a contribution to equity would have had a restructuring effect.</li>
<li>No Obligation to Implement Simultaneous Restructuring Measures: 
Even if a shareholder grants a loan to an undercapitalized company without simultaneously implementing restructuring measures, this alone does not constitute an obvious abuse of rights.</li>
</ul>
Finally, the Court rejected any need to fill a perceived legal gap through case law. Swiss law is not incomplete in this regard; the legislature deliberately refrained from introducing more restrictive rules on equitable subordination of related-party claims as part of the corporate law reform effective January 1, 2023.
<h3>4. Practical Consequences for Restructurings</h3>
This decision provides welcome clarity for practice but also imposes high standards for the careful planning and documentation of restructuring measures:
<ul>
<li>Legal and Planning Certainty: 
Going forward, shareholders and related investors can have greater confidence that their loans will be treated pari passu with other third-class claims in bankruptcy proceedings. In our view, the risk of equitable subordination based on this decision is low.</li>
<li>Importance of the Over-Indebtedness Test: 
It remains crucial to assess carefully whether balance-sheet over-indebtedness exists at the time of the loan. If there is no over-indebtedness, a later allegation of abuse of rights is likely to be difficult to assert.</li>
<li>Proper Documentation of Loans: 
Loan agreements should be clearly documented and explicitly state that no subordination is intended. This effectively rules out an implied subordination.</li>
</ul>
<h3>5. Requirements for Future Restructurings Supported by Related Parties</h3>
This decision illustrates the framework within which related parties can contribute to restructuring efforts while minimizing legal risks:
<ul>
<li>Liquidity Planning and Restructuring Measures: 
The Board of Directors must continuously monitor the company’s liquidity position (Art. 725 of the Swiss Code of Obligations). Loans can serve as temporary bridging measures but should be supported by sustainable restructuring plans.</li>
<li>Early Communication with Creditors: 
Open dialogue with major creditors helps to build trust and mitigate potential allegations of abuse of rights.</li>
<li>Combination of measures: 
Irrespective of this decision, loans should, where possible, be combined with other restructuring contributions such as capital increases, debt waivers or express subordination in order to increase the chances of success of a long-term restructuring.</li>
</ul>
<h3>6. Conclusions and Outlook</h3>
According to this leading decision, the equitable subordination of distressed loans from related parties is justified only in exceptional cases. This development offers greater legal certainty for future restructurings but also demands careful documentation, clear contractual arrangements, and a robust financial analysis of the company at the time the loan is provided.
The decision strengthens the options available to shareholders and investors but also sets clear guidelines for responsible financial planning and corporate governance.

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The offering was conducted by way of (i) a placement to professional investors in Switzerland or in any other circumstances relying on an exemption from the obligation to publish a prospectus under the Swiss Financial Services Act, (ii) private placements in certain jurisdictions outside of Switzerland and the United States, and (iii) private placements within the United States to qualified institutional buyers in reliance on Rule 144A under the U.S. Securities Act.
Goldman Sachs, Morgan Stanley and UBS acted as Joint Global Coordinators and Bookrunners, Citigroup and Deutsche Bank acted as Joint Bookrunners as well, and Crédit Agricole and Zürcher Kantonalbank acted as Co-Lead Managers in connection with the offering.
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Homburger advised Zurich Insurance Company Ltd in connection with new debt facilities entered into in relation to Zurich Insurance Group Ltd’s offer for Beazley plc

On March 2, 2026, Zurich Insurance Group Ltd (SIX: ZURN) announced its recommended all-cash offer for the entire issued and to be issued share capital of Beazley plc (Beazley). The transaction combines two highly complementary businesses, accelerating Zurich’s strategy to create the global leader in Specialty insurance. It is intended that the cash consideration for the Beazley shares will be satisfied by applying drawings from the new debt facilities, alongside existing cash resources and proceeds from Zurich Insurance Group Ltd’s recent equity raise.
Homburger advised Zurich with respect to all Swiss law aspects of this new debt financing.
The Homburger team was led by Stefan Bindschedler (Financing) and Hansjürg Appenzeller (Corporate / M&amp;A, Insurance) and included Fabrice Eckert (Insurance, Financing) and Matthias Müller (Corporate / M&amp;A). Dieter Grünblatt and Arbnor Sheholli provided tax advice.

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Shareholder Loans to Companies in Financial Distress

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Homburger advised Roche Holding in the refinancing of its USD 7.5 bn revolving credit facility

Homburger advises Zurich Insurance Group Ltd on the placement of 7,090,909 newly issued shares through an accelerated bookbuilding process, raising gross proceeds of CHF 3.9 bn

Homburger advised Zurich Insurance Company Ltd in connection with new debt facilities entered into in relation to Zurich Insurance Group Ltd’s offer for Beazley plc

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