The financial support of a company in need of restructuring is not only associated with risks from an economic point of view. If the company falls into bankruptcy after repayment of a loan or if composition proceedings [Nachlassverfahren] are opened, there is a risk that the creditor - because of a claw back action pursuant to art. 288 of debt enforcement and bankruptcy act- will have to pay back the loan to the company despite it having been repaid in the meantime.
In a decision of the Federal Supreme Court published at the end of 2020, the Federal Supreme Court recalls the requirements that restructuring loans need to fulfill to be resistant to claw back actions.
What were the facts of the case?
The plaintiff, a construction company, found itself in financial difficulties in 2011 and thereupon concluded various agreements:
- The plaintiff concluded an agreement with the bank consortium that granted several loans, in which the bank consortium agreed to an extension and new arrangement of the loans and a reduction of the same to zero by June 30, 2012.
- The plaintiff concluded an asset deal agreement with G. AG, another construction company, according to which the former took over, among other things, the plaintiff's business inventory, employment contracts and work not yet started and agreed to make the inventory and personnel available to the plaintiff for a limited period to complete the final work.
- The banks involved, the existing shareholders and the executives signed letters of subordination and the Chairman of the Board of Directors granted the plaintiff an additional loan.
Based on the agreement with the bank consortium, the plaintiff repaid approximately 92% of the loans (almost CHF 2.3 million) to the bank consortium by February 2012. Thereafter, its financial situation deteriorated and on May 2, 2012, the Claimant filed a petition for debt-restructuring moratorium, which was granted on May 15, 2012. On August 7, 2012, a composition agreement with assignment of assets was confirmed and a liquidator was appointed.
On July 24, 2014, the liquidator filed a claw back action suit against the bank consortium on behalf of the plaintiff and demanded repayment of the almost CHF 2.3 million.
The court of first instance approved the claw back action. The second-instance court overturned the judgment in favor of the appeal and dismissed the action. The plaintiff then appealed to the Federal Supreme Court.
How did the Federal Supreme Court rule?
At the beginning, the Federal Supreme Court summarizes the requirements for a claw back action. The action according to Art. 288 of the swiss debt enforcement und bankrupcty act requires, in addition to the actual damage to the creditor, the intention of the debtor to cause damage to the creditors.
The Federal Supreme Court holds that the repayment of a loan in a restructuring situation in principle constitutes a damage to the creditor (E. 3.4.2).
However, the decisive factor is the intention to harm other creditors. According to the Federal Supreme Court, such intention exists if the debtor could and had to foresee that the contested act would disadvantage creditors or favor them over others. According to case law, it is sufficient if the debtor that creditors would be harmed as a natural consequence of his actions (E. 3.5.1).
The repayment of a loan is a strong indication of such an intent to harm if the debtor was aware of his financial distress. However, there is no intent to harm if the debtor is seriously working to rescue itself and the rescue attempt appears promising. In this case, the loan is a restructuring loan.
Thus, according to case law, the taking out and repayment of a loan is regarded as a restructuring loan resistant to a claw back action if the following preconditions are met:
- The debtor must make efforts to restructure itself,
- The restructuring efforts must appear promising, and
- The loan must be granted for the purpose of restructuring and thus is in the interest of the other creditors.
The Federal Supreme Court holds that the extension of a pre-existing loan can also be qualified as a restructuring loan, provided that the will to restructure is expressed (e.g. by a restructuring agreement) and the behavior (such as through special benefits, actual concessions, direct support of the company to be restructured) differs from ordinary lenders (E. 3.5.2).
In the present case, the Federal Supreme Court concludes (as did the second-instance court) that the credit extension agreement constitutes a special performance of the banking consortium and that the restructuring efforts appeared to be promising as a result. Accordingly, at the time of the conclusion of the agreement, there were justified hopes, that all claims (not covered by subordination) could be fully satisfied with the restructuring efforts.
The extension of the loans could therefore be regarded as a restructuring loan. The appeal and the claw back action were therefore dismissed.
What are the conclusions of the decision?
The following conclusions can be drawn from the above-mentioned decision:
- If a company in need of restructuring repays outstanding loans prior to the opening of bankruptcy or composition proceedings, the repayment is subject to a claw back action risk, i.e. the creditor may have to pay back the loan to the company.
- Only the repayment of a so-called restructuring loan is resistant to a claw back action. Such a loan exists if the debtor makes efforts to restructure the company, the restructuring efforts appear promising and the loan is granted for the purpose of restructuring.
- Not every payment to a debtor in a precarious ﬁnancial situation qualiﬁes as a restructuring loan. The circumstances of the individual case must always be considered.