<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 &#8222;equity-replacing loan (eigenkapitalersetzendes Darlehen)&#8220; and &#8222;equitable&#8220; or &#8222;implied subordination.&#8220;
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 &#8222;from the end of 2016, the company’s bankruptcy was a serious risk.&#8220; 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 &#8222;subordinated third-class claims.&#8220; 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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Shareholder Loans to Companies in Financial Distress

<h3>Swiss Federal Supreme Court provides helpful guidance in respect of pre-negotiated sales of a company&#8217;s business in the context of a restructuring («pre-pack»)</h3>
In UK and US law, so-called «pre-packs» have long been established as an effective restructuring measure. In its recently published decision 5A_827/2019 dated March 18, 2021 (announced for publication as a leading decision), the Federal Supreme Court has now for the first time confirmed the previous legal practice of privately pre-negotiated, confidential pre-pack restructurings in Switzerland and thus provided legal certainty under Swiss law.
<h4>Facts and Decision</h4>
The Federal Supreme Court decision concerned the sale of an IT company with around 70 employees. Initially, the applicant, a company in financial distress, founded a subsidiary company and prepared the transfer of its IT business by means of an asset transfer agreement. In a private bidding process, a purchase price of approximately CHF 1.3 million was determined for the newco. A few days after the establishment of newco, the insolvent company applied for the opening of the provisional moratorium (provisorische Nachlassstundung) with the following elements:
<ul>
<li>appointment of an administrator</li>
<li>waiving of the publication of the debt-restructuring moratorium (so-called «silent moratorium», stille Stundung).</li>
</ul>
On December 13, 2018, the competent court approved the request for provisional moratorium of the insolvent company without publishing the decision.
Shortly thereafter, the competent court approved the request of the administrator to transfer certain assets and liabilities to the newco and the subsequent sale of all shares of the newco to the previously selected bidder. The decision was disclosed only to the insolvent company as the applicant and the administrator. Less than four months after the court approval of the pre-pack, the competent court granted the definitive moratorium. This decision was published. A creditor filed an appeal against it, claiming, inter alia, that the bankruptcy of the insolvent applicant should have been opened already as of December 13, 2018 and that the approval of the pre-pack should be declared null and void.
The Federal Supreme Court dismissed the creditor&#8217;s appeal on all points to the extent that it was upheld.
<h4>Main Considerations of the Federal Supreme Court</h4>
<ul>
<li>The creditor cannot challenge the granting of the provisional moratorium and request its revocation with retroactive effects.</li>
<li>Approval of a pre-pack may be envisaged if negotiations with a buyer are at an advanced stage and a better result for the creditors can be expected with such an immediate sale compared to a bankruptcy.</li>
<li>The creditor did not have to be heard for the approval of the pre-pack and had no rights to participate in the decision making process.</li>
<li>The contract negotiations, the determination of the sale price, the execution of the contract and its approval by the court could be carried out confidentially and without the need to involve the creditor.</li>
<li>Even if the creditor would have been informed about the approval of the pre-pack, the creditor would not have been entitled to challenge the decision.</li>
<li>In the case at hand, there were no indications that the decision of the competent court was null and void.</li>
</ul>
<h4>Assessment and Outlook</h4>
In Switzerland, pre-packs are increasingly gaining importance as a restructuring solution which, compared to bankruptcy, often allows for a better preservation of value for the debtor, employees and business partners concerned. The decision of the Federal Supreme Court confirms previous court practice of regional competent courts, some of which approved a pre-pack within a few days. This previous practice underscores the following advantages of the Swiss pre-pack:
<ul>
<li>The business transfer can be prepared confidentially.</li>
<li>In contrast to certain foreign procedures, there is no need for a public bidding process.</li>
<li>The restructuring can be completed quickly.</li>
<li>Upon receipt of court approval, the bar for contesting a pre-pack is set high and therefore such transactions provide more security for buyers.</li>
<li>The sale of a business unit by means of a pre-pack often generates higher proceeds than in bankruptcy liquidation.</li>
</ul>
In addition to the foregoing advantages, the Swiss pre-pack has following remarkable features:
<ul>
<li>Buyer may choose to acquire only selected assets, liabilities and contracts (albeit subject to administrator and court approval);</li>
<li>buyer may take over certain, but not all, employees in connection with the transferred business, without being liable for pre-existing claims of the employees against the insolvent debtor (e.g., outstanding salary);</li>
<li>no joint liability of debtor and buyer for employee claims.</li>
</ul>
Thanks to the advantages and increasing practice of Swiss pre-packs, they are likely to gain in importance, also in an international context in the future.

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Homburger News: Idorsia

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On February 26, 2025, Idorsia Ltd announced that it has reached an agreement with more than two-thirds of its convertible bondholders – a majority sufficient to pass resolutions at the relevant bondholders’ meetings – to restructure its outstanding convertible bond debt. The agreement includes a tailored restructuring of Idorsia’s total CHF 800 m convertible bond debt and a CHF 150 m new money facility, enabling the company’s continued operations.
As a first step of the restructuring, a bondholders’ meeting was held on February 25, 2025 to approve the extension of the maturity of the convertible bond 2025 (CB2025) until September 17, 2025. In a second step, Idorsia intends to call bondholders’ meetings to amend the terms of both the CB2025 and the convertible bond 2028 (CB2028) to, among others, extend the maturity date by 10 years, subject to the approval by the relevant court. In a third step, a special purpose vehicle (SPV) will be created. Idorsia intends to transfer to this SPV its rights to selatogrel and cenerimod, and its rights to aprocitentan. A bond exchange offer will be launched by the SPV, where the CB2025 and CB2028 bondholders will be offered the opportunity to exchange their convertible bonds for newly created notes issued by the SPV. For participating in the exchange offer, bondholders will be entitled to receive up to a total of 8.04 m Idorsia shares and up to a total of 8.04 m Idorsia warrants. Any potential net payments for milestones and royalties from selatogrel and cenerimod, as well as any potential net proceeds from a deal for aprocitentan will be used to repay holders of the SPV notes. Idorsia’s rights to all three products will return to Idorsia once the SPV notes have been fully paid.
In addition to the holistic restructuring, Idorsia has secured a new money facility for a net amount of CHF 150 m that will extend Idorsia’s cash runway into 2026. This new money facility will be repaid within 24 months and is fully backstopped by a bondholder group who will receive a total of 9.0 m Idorsia shares and 8.0 m Idorsia warrants. All bondholders will also be invited to participate in this new money facility. Those bondholders participating in the new money facility will be entitled to receive up to a total of 10.5 m Idorsia shares and up to 9.5 m Idorsia warrants. In addition, they will receive in the bond exchange offer in return (up to a certain amount) SPV notes which are repaid first. Finally, all bondholders will be offered the opportunity to participate in the binding lock-up agreement in return for a 1% capitalized fee.
The restructuring and financing measures are expected to significantly strengthen Idorsia’s financial position, allowing the company to advance its business strategy and create long-term value for stakeholders.
Homburger advises Idorsia Ltd as lead corporate, restructuring and capital markets counsel. The Homburger team is led by Frank Gerhard (Corporate / M&amp;A) and includes Eduard De Zordi (Capital Markets), Marco Rostetter (Corporate / M&amp;A, Restructuring / Insolvency), Estelle Piccard and Daniel Hulmann (Corporate / M&amp;A, Capital Markets), Miguel Sogo (Litigation, Restructuring / Insolvency), Stefan Oesterhelt (Tax), Jeremy Reichlin (Employment, Restructuring / Insolvency) and Oliver Mrose (Litigation, Restructuring / Insolvency) as well as Rebecca Sigrist (Corporate / M&amp;A) and Syra Angliker (Litigation, Restructuring / Insolvency).

Homburger advises Idorsia Ltd on its holistic restructuring comprising the restructuring of its outstanding convertible bonds in a total amount of CHF 800 m and the raising of CHF 150 m through a new money facility

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Homburger advises high-growth, global alternative asset manager Apollo Global Management, Inc. (Apollo; NYSE: APO) on the acquisition of The Travel Corporation (TTC), a leading international travel group. TTC, which has been privately owned and operated for more than a century, is a global portfolio of 18 market leading travel brands, including Trafalgar, a leading escorted tour operator, Uniworld Boutique River Cruises, a luxury all-inclusive river cruise line, Contiki, youth travel specialist tour company, premium guided vacation company Insight Vacations, as well as other global travel brands and supporting business entities.
The Homburger team is led by Daniel Hasler and includes Marco Rostetter, Nicola Togni, Léonard Aeschlimann, Isabelle Cordey and Luc Huber (all Corporate / M&amp;A), Gabriel Kasper (Data Protection and IP / IT) and Manuel Adassery (Regulatory and Litigation).

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On June 28, 2024, wefox Holding AG announced that it has secured EUR 25 m in fresh capital to support the ongoing restructuring efforts with further capital being realized through the continued sale of non-core assets.
Homburger AG advises wefox Holding AG on its financing transactions and restructuring efforts. The Homburger team comprises Andreas Müller, Oriana Schöni, Oliver Kneubühl and Norina Tröhler (all Corporate / M&amp;A; Technology and Digital Economy), Stefan Kramer and Marco Rostetter (both Restructuring), Jürg Frick, Stefan Bindschedler and Nathalie Scherrer (all Financing and Investment Products), Stefan Oesterhelt, Juliette Buob and Laetitia Fracheboud (all Tax), and Angela Casey (Employment and Executive Compensation).

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Homburger advises Idorsia Ltd on its holistic restructuring comprising the restructuring of its outstanding convertible bonds in a total amount of CHF 800 m and the raising of CHF 150 m through a new money facility

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Shareholder Loans to Companies in Financial Distress

New «leading case» on Swiss pre-pack restructurings

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