In cases where subordination has been agreed in an agreement with creditors, the main creditors thus do not depend on the liquidator to decide on subordination in the list of claims. If the liquidators ignore the relative subordination and make distributions to the subordinate creditor, the latter will have to hand over these distributions to the power of attorney for the use of the proceeds. Therefore, lead creditors can assert their claims under the subordination clause against the subordinate creditor or representative. This agreement is a bilateral short-term credit agreement regulated by Switzerland between two Group companies in which it is provided that the loan will be subordinated to the claims of other existing and/or future creditors. The subordinated contract can only be terminated when the borrowing company is no longer over-indebted, which can be assessed after going concern. Until then, the subordination agreement will remain in force, according to the Federal Court. The question of whether a liquidator should also take into account a subordination agreement that automatically benefits only certain creditors (relative subordination) is the subject of controversial discussion. Some authors and liquidators argue that a relatively subordinated claim should be allowed in the list of claims, such as a normal claim and dividend payments to the subordinated creditor. According to the prevailing view, however, relative subordination should be applied by the liquidator as well as subordination in accordance with Article 725 II CO. In this case, the dividend due to the subordinated creditor would not be paid to the subordinated creditor, but directly to the senior creditor (in addition to the dividend of the senior creditor) until the principal claim is paid in full. Once the principal creditor has been paid, the remainder of the subordinate creditor`s dividend would be paid for the subordinate creditor`s own claim. A subordination agreement is a legal document that states that one debt takes precedence over another in order to recover a debtor`s repayment.

The priority of debts can become extremely important if a debtor defaults or files for bankruptcy. Subordination agreements are subject to the choice of law. If insolvency or composition proceedings are opened through a company domiciled in Switzerland, i.e. insolvency or composition proceedings, such proceedings are subject to Swiss law. Therefore, if the question arises as to whether a contract of subordination is valid and how to qualify it, foreign law – often English law – may apply. The question of how subordinated claims are to be dealt with in Swiss insolvency proceedings is governed by Swiss law, in particular the Swiss Law on Debt Enforcement and Bankruptcy (DEBL). When a group of lenders grants the loan to the same borrower, it usually enters into an agreement with the creditor, the key element of which is a subordination determination that determines the rank and priority of claims for repayment. In addition, in financing transactions, the subordination of intra-group financing, i.e. credit agreements between Group companies, is often considered to be the creditor`s claim. In Switzerland, subordination agreements also serve as an instrument in company law (Art.

725 II Code of Obligations (CO)), which allows over-indebted companies to continue their commercial activities. Subordination clauses in inter-creditor agreements or other debt financing structures, on the one hand (subordination) and subordination agreements that meet the requirements of § 725 II CO (resignation), on the other hand, serve different purposes and must be carefully distinguished. Although all subordination agreements are concluded with a view to the possible insolvency of the borrower, their effect and enforceability in Swiss insolvency proceedings are only clear if they fall under Article 725 II ORV, while the treatment of other contractual subordinations is uncertain. Individuals and businesses turn to credit institutions when they need to raise funds. The lender will be compensated if it receives interest payments on the amount borrowed, unless the borrower is in default of payment. The lender could require a subordination agreement to protect its interests if the borrower places additional privileges on the property, such as if .B they were to take out a second mortgage. Intra-group financing can be subordinated for a variety of reasons, for example to implement a group financing strategy and tax planning or to stabilize the borrower`s financial situation in times of over-indebtedness (potential). Note that subordination may require certain formalities, including business approvals and/or tax audit and assessment of transaction terms, to ensure compliance with the arm`s length principle. So far, Swiss courts have not had the opportunity to consider whether a liquidator is required to take into account an agreement providing for relative subordination in favour of certain creditors.

Until the Federal Supreme Court has issued a judgment in this regard, the enforceability of a relative subordination agreement, as often used in financing transactions, is uncertain in Swiss insolvency proceedings. In addition, there is a controversial discussion as to whether the principal creditor has the right to file the subordinated claim in insolvency proceedings on behalf of the subordinate creditor. Some authors disagree with this view, arguing that the principal creditor has only one claim for compensation against the subordinated creditor if the subordinate creditor fails to file its claim. For all these reasons, alternative mechanisms to relative subordination should be considered when dealing with Swiss companies. In addition to the subordination provided for in Article 725 II of the Swiss Code of Obligations, which is an instrument of company law and may allow for restructuring measures, subordination agreements can be used to guarantee debts to one or more specific creditors and are most often used in the context of financing operations. Since subordination under Article 725 II CO benefits all other creditors, it is often referred to as general subordination. This contrasts with subordination agreements, which are intended only to benefit only certain lenders, i.e. to provide for relative subordination.

If the subordination is not intended to have the effect of Article 725 II CO, it does not necessarily fulfil the conditions described above. However, in most cases, a subordination agreement includes a deferral as well as a prohibition on repayment or compensation to ensure the intended effect of the subordination. In addition, the subordinate creditor may assign his claim to the senior creditor. However, such an assignment of the subordinated receivable is not absolutely necessary to achieve the relative subordination. An agreement to subordinate a claim does not constitute a waiver. The borrowing company must continue to recognise subordinated claims as liabilities and report the subordinated loan separately in the annual financial statements. Consequently, the subordination itself does not constitute a restructuring measure, as the financial situation of the undertaking remains unchanged. However, subordination agreements increase the chances for a company in difficulty to recover financially by leaving more time to implement restructuring measures. .