Creditor subordination agreements are crucial in financial distress situations. They defer claims and represent economic equity, often necessary to protect other creditors and improve restructuring prospects. Including interest is essential for full subordination. Agreements concluded before 2023 without interest remain valid, as the legal change is not retroactive. ExpertSuisse's position on this matter is overly strict.

German version published in Jusletter 24. März 2025, see https://jusletter.weblaw.ch/juslissues/2025/1234.html

1.      Background

Subordinated loans or subordination agreements are key instruments when companies face financial distress. Four key questions arise:

• What are subordination agreements?
• Why must rescue loans generally be subordinated?
• What level of subordination is required?
• How should interest-free subordination agreements be handled?

2.      What are subordination agreements?

A subordination agreement is a bilateral agreement between creditor and debtor deferring an existing claim's principal and interest payments during over-indebtedness. Upon bankruptcy or liquidation, the creditor subordinates this claim to all other creditors (1). ExpertSuisse argues too formalistically that subordination neither eliminates over-indebtedness nor constitutes restructuring, but merely relieves the debtor's notification duty (2). This overlooks the unanimous legal doctrine that new or existing subordinated loans effectively constitute equity. For creditors, the company's financing source, whether shareholders or creditworthy lenders, is immaterial (3).

To avoid disputes during the audit, subordination should follow the ExpertSuisse model (4). The agreement's key points are:

• Determine and defer the total claim, including interest.
• Conditionally waive the claim in case of bankruptcy (including due to organizational deficiencies), or a composition agreement with asset transfer, until all other creditors are fully paid and all liquidation, deferral, or bankruptcy costs are covered.
• Prohibit claim repayment, offsetting, or securing by the creditor.
• Terminate the agreement only when audited or interim financial statements confirm the elimination of over-indebtedness.
   

3.      Why must rescue loans generally be subordinated?

Subordination is usually essential for rescue loans for financially distressed companies to protect existing creditors. Non-subordinated loans increase total creditor claims on company assets, which are distributed among creditors in bankruptcy. Subordination gives existing creditors priority, preventing claim dilution from new borrowing. A new, non-subordinated loan would worsen existing creditors' recovery prospects without increasing assets. Specifically, subordinated creditors' claims are satisfied only after full payment of senior creditors (5).

A short-term loan addresses immediate liquidity issues, but not long-term solvency. If the underlying financial problems remain unresolved, the loan merely delays, not prevents, bankruptcy. A non-subordinated loan increases debt and – compared to a subordinated loan - reduces recovery chances.

Subordination, on the other hand, signals that the new lender is taking on a higher risk and will be subordinated in the event of insolvency. This can encourage other creditors to continue lending or waive claims, supporting long-term restructuring.

4.      What level of subordination is required?

Positive going concern forecasts usually mean subordination agreements only need to cover existing over-indebtedness. Auditing practice, however, often requires accounting for potential losses up to the next balance sheet date to prevent future over-indebtedness (6). This resembles the legislature's originally planned (but ultimately rejected) restructuring prospect requirement (7). While auditing practice may justify considering three months of losses, longer periods lack a legal basis. The liquidity plan should offset any further anticipated losses with corresponding planned additions.

5.      How should interest-free subordination agreements be handled?

The new law requires subordination agreements to include interest (8). If this is not the case, a distinction must be made as to whether the agreement was concluded before or after the amendment to the law came into force.

5.1. Subordination agreed after 1 January 2023

Three opinions exist regarding subordination agreements concluded after 1 January 2023, that do not expressly include interest:

• One opinion holds that interest is automatically included. (9) This applies only if a contractual gap exists and including implied interest aligns with the parties' demonstrable or presumed intent, interpreted in good faith. Otherwise, this interpretation is inadmissible.
• A second opinion suggests such agreements may be invalid (10). This is likely incorrect, as it unfairly advantages the creditor in bankruptcy, unexpectedly harming other creditors typically unaware of this provision. This consequence is untenable.
• A third, mediating opinion is likely correct: If a good-faith interpretation of the contract indicates interest is excluded, it must be deducted from the subordinated amount, resulting in partial subordination. In a balance sheet at liquidation values, this represents interest until the loan's maturity.

5.2. Subordination agreed before 1 January 2023

Subordination agreements concluded before 1 January 2023 without interest remain valid. The non-retroactivity rule (Art. 1 Final Title Swiss Civil Code) generally prevents legal changes from affecting pre-existing circumstances. Parties expect contractual performance and consideration to remain balanced, regardless of subsequent legal changes.

While Art. 2 Final Title Swiss Civil Code allows retroactive application in exceptional cases concerning public order (ordre public) or morality, the interest requirement in subordination agreements, though economically significant, does not represent a fundamental societal or ethical shift.

ExpertSuisse suggests adapting contracts by 31 December 2024, per Art. 6 of the transitional provisions, requiring adaptation within two years of the new law. However, they acknowledge this interpretation's contentious nature and recommend supplementing existing agreements to avoid litigation and risks for directors and auditors.

Legal authors Oehri/ Waibel's have analyzed the commission minutes: These indicate that Art. 6 of the transitional provisions (CO amendment of June 19, 2020) applies solely to contractual relationships with board members, etc., pursuant to Art. 735b CO. This is logical given the need for swift adjustments within the previous Ordinance of 20 November 2013 against Excessive Remuneration in Listed Companies Limited by Shares (VegüV). Therefore, pre-existing subordination agreements fall under the general rules of Art. 1 Final Title Swiss Civil Code, specifically the non-retroactivity rule, and remain full valid..

Author: Matthias Staehelin

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1. ExpertSuisse, PS-CH 290 Drohende Zahlungsunfähigkeit, Kapitalverlust und Überschuldung, Rz. 8, valid starting 1 January 2023.
2. PS-CH 290 (Fn. 1) Rz. A-21.
3. Christian Wenger/Daniel Oehri, Eine Übersicht über die Aufgaben und Pflichten des Verwaltungsrats bei finanzieller Notlage, RR-VR 4/2022, 5; siehe Art. 757 Abs. 4 OR, der Gläubiger von nachrangigen Forderungen von Verantwortlichkeitsprozessen ausschliesst; Nicolas Rouiller/Marc Bauen/Robert Bernet/Colette Lassere Rouiller, La société anonyme Suisse, 2022, N 173b.
4. The German template applicable from 1 January 2023, can be found hidden at https://www.treuhandsuisse.ch/sites/default/files/2023-11/SIFER_2.1.6_Rangrücktrittsvereinbarung%20Muster%20ab%201.1.2023_d_1.docx, besucht am 9. März 2025.
5. Further information and differentiation for subordination agreements that only cover some of the creditors: Lukas Glanzmann, Rangrücktritt oder Nachrangvereinbarung? Aufsätze Anwendungsbereiche, Ausgestaltung und Grenzen zweier ungleicher Instrumente der Mezzanine-Finanzierung, GesKR 2007, 6–23.
6. ExpertSuisse PS-CH 290 (Fn. 1) A.24; Daniel Hunkeler/Georg J. Wohl/Zeno Schönmann, Zahlungsunfähigkeit, Kapitalverlust, Überschuldung Art. 725–725c OR, 607, in: Peter Nobel/Christoph Müller (Hrsg.), Das Aktienrecht – Berner Kommentar der ersten Stunde, Bern 2023, § 17.
7. Hunkeler/Wohl/Schönmann (Fn. 6), 608; Lukas Glanzmann/Benedikt L Rutscheidt, Die Finanzverantwortung des Verwaltungsrats in Sanierungssituationen, Expert Focus EF 2021, 310, 314; siehe auch BGer, Urteil 4C.47/2003 vom 2. Juli 2003 E. 2.2.
8. Art. 725b Abs. 4 Ziff. 1 CO.
9. Hunkeler/Wohl/Schönmann (Fn. 6), 607; Glanzmann/Rutscheidt (Fn.7), 314.
10. Beat Rüfenacht, Standards zur Abschlussprüfung: PS-CH 290, EF 2022, 298, 300; Expert Suisse, Übergangsbestimmungen zu den neuen Schweizer Standards zur Abschlussprüfung (SA-CH), 12. Juli 2022, Frage 4.
11. Compare, for example, with the facts of BGE 141 III 1,, 4: No retroactive effect if the provisions on the admission and residence of foreign nationals have been circumvented by marriage.
12. Expert Suisse, Ausgewählte Fragen und Antworten zu Pflichten bei drohender Zahlungsunfähigkeit, Kapitalverlust und Überschuldung gemäss revidiertem Aktienrecht, Juni 2023, Frage 23.
13. Daniel Oehri/Alessa Waibel, Aktienrechtsrevision – Ausgewählte (Sanierungs-) Themen in der Praxis, 2023, 2, https://www.wengervieli.ch/getattachment/004249a0-a8f9-46a2-bf5e-5d6cf3bed967/Aktienrechtsrevision-–-Ausgewahlte-(Sanierungs-)Themen-in-der-Praxis.aspx.