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Updated 19.07.2024

Subordination agreement 

Postponement of claims against a Swiss or foreign company until the financial situation improves, and priority given to other creditors in the event of bankruptcy.

Use this contract:

  • When you have a claim against a Swiss or foreign company, either as a shareholder or as a third-party creditor.
  • When the company needs debt restructuring to cover losses and avoid bankruptcy.
  • If the debt will not bear interest during the postposition and will not be repaid until the company’s financial situation improves.
  • If you wish to downgrade your position after any other creditor in the event of the company’s bankruptcy.
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Jurisdiction: Switzerland
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Protect yourself legally as a creditor with the following options: 

  • Total or partial postposition of the debt. 
  • Clear determination of the effects and restrictions of the postposition. 
  • Possibility to lift the postposition up to the amount subordinated by another creditor. 

Safeguard your interests as a company by using the following clauses: 

  • Obligation for the assignee to accept the postposition in the event of assignment of the debt. 
  • No contractual interest, interest on arrears or reminder fees. 
  • Unreserved retention of the company’s counterclaims, prohibiting any set-off.

Subordination agreement

Our subordination agreement template allows you to draft a professional debt subordination agreement to be signed between a creditor and a debtor company to postpone the repayment of a debt. With this sample, it’s possible to suspend payments on debt until the improvement of the business’s financial situation. 

A business uses our subordination agreement example: 

  • When a Swiss limited liability company is in a state of over-indebtedness or capital loss (for example: liabilities exceed assets or losses exceed Âœ of share capital and legal reserves).
  • To prevent the necessity of filing for compulsory bankruptcy procedures and to facilitate the restructuring of its financial situation.
  • To retrograde the creditor’s position after all other creditors of the company, by way of subordination.

Key aspects of a subordination agreement 

  • A subordination agreement sample is suitable for use by a debtor company concerning third-party creditors, related parties, or shareholders. 
  • The document should clearly outline the currency, amount, and interest on the postponed debt, and subordinated amount, as well as include a termination clause. 
  • A shareholder creditor typically agrees to subordination at the time of loan issuance or debt declaration. 
  • Third-party creditors may choose to enter a subordination agreement under certain circumstances. 

Eight tips on a subordination agreement 

To protect your legal and financial interests as a company, we advise you to choose from the following options of our subordination agreement template: 

  • Non-revocable nature of subordination until the financial situation improves. 
  • Release from the obligation to deposit financial statements before a bankruptcy judge, as long as the debt remains postponed. 
  • Prohibition to compensate the subordinated amount with any existing or future counterclaim. 
  • Suspension of any applicable interest until the agreement comes to expiration. 

Our subordination agreement example offers protection and benefits to the creditor as well, for example: 

  • Legal title to an acknowledged debt and obligation to repay under terms of subordination. 
  • Option to convert the subordinated amount into the share capital of the company, in lieu of repaying the debt. 
  • Early release from subordination up to an equivalent amount postponed by any third-party creditor. 
  • Accumulation of suspended interest without waiver, until it can be repaid together with the outstanding debt. 

Create a subordination agreement with AdminTech 

With AdminTech’s online document builder and the subordination agreement sample, all you need to do is fill in the required fields with the relevant information to adjust the document to your specific situation. 

A professional debt subordination agreement covers the following information:  

  • Parties’ contact details and identification 
  • Currency, origin, and amount of debt 
  • Accrued interest, penalties, and other fees up to subordination to date 
  • Subordinated amount and suspension or waiver of interest 
  • Possibility of conversion into the share capital of the company 
  • Term of agreement and conditions of release and termination. 

FAQ on a subordination agreement 

When should you draft a subordination agreement?  

Without having the obligation, a subordination agreement template is commonly used when a Swiss debtor company is in one of the following situations: 

  • Liabilities of the company exceed its assets (over-indebtedness) 
  • Losses exceed Âœ of the share capital and legal reserves (loss on capital) 

To avoid filing for bankruptcy in such cases, the parties may choose to subordinate all or part of the outstanding debt.  

What are the effects of subordination on the creditor? 

In either example mentioned above, a subordination agreement would necessarily impose the following restrictions on the creditor: 

  • No pursuit or forceful execution of the postponed debt or interest 
  • No enforcement of pledges or guarantees 
  • No compensation with counterclaims of the debtor company 
  • In the event of bankruptcy, priority is given to other creditors. 

However, our template allows the following options for the creditor: 

  • Irrevocable waiver of all or part of the subordinated amount 
  • Conversion of the debt into the share capital 
  • Calculation of interest until the terms of release are fulfilled. 

What are the consequences of subordination on the debtor? 

A subordination of debt agreement often stipulates the following restrictions on the debtor: 

  • No repayment of the postponed debt or interest 
  • No compensation with counterclaims nor suspension of counterclaims 
  • No additional guarantee to the creditor nor additional business interest. 

How can a subordination clause be terminated? 

A subordination agreement of any form comes to an end in the following circumstances: 

  • The financial situation of the debtor company is improved and allows repayment of all or part of the subordinated debt 
  • A third-party creditor provides a subordination up to an equivalent amount 
  • Bankruptcy of the debtor with or without eventual repayment of outstanding sums 
  • Conversion into capital or waiver of the subordinated debt. 

In our template, the parties may likewise specify a minimum duration, even if one of the release conditions is met. 

Who may draft a subordination agreement? 

A subordination contract is more commonly used by a shareholder or a company within the group to postpone bankruptcy and ensure the restructuring of their financial situation. Such an act is typically accompanied by the granting of additional funds in the form of a subordinated loan. 

Third-party creditors may likewise subordinate a debt, in particular where their interest in continuing cooperation and keeping the company financially stable is more important than the pursuit of short-term reimbursement. 

What is the difference between subordination and waiver of claim? 

Whereas a waiver is irrevocable and definitive, a subordination is a temporary suspension on payment of the debt, subject to a release condition. 

What are the alternatives to subordination? 

Depending on the circumstances, a shareholder may opt for the following alternatives to subordinating a debt: 

  • Waiver and conversion into equity reserves, without compensation of accounting loss 
  • Abandonment of debt to cover retained losses 
  • Conversion of the subordinated amount into the share capital of the company. 

For a third-party creditor, however, it is possible to waive the debt in return for: 

  • A share in the stock of the company (convertible option) 
  • Dividend right certificates 
  • Recuperation certificate, allowing repayment with or without a bonus once the financial situation improves. 

How can a company ensure a successful subordination operation? 

To ensure a successful subordination of a debt, we recommend the following steps: 

  • Verify if the company has sufficient hidden reserves to offset losses. 
  • Determine the pool of creditors willing to cooperate and act in mutual interest. 
  • Calculate the necessary subordination amount, including by granting an additional shareholder’s loan, if necessary. 
  • Evaluate the risks and ongoing concerns of the company, as well as its restructuring strategy. 
  • Create and sign the agreement using our subordination agreement template. 
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