Switzerland Update: Loss of capital, over-indebtedness, and (in)ability to pay

The new company law, which will come into force on January 1, 2023, provides for numerous adjustments and innovations regarding capital loss, over-indebtedness, and (in)solvency. In this article of our blog series on the new company law, we shed light on what will have to be taken into account.

Monitoring liquidity

In addition to monitoring the balance sheet situation with regard to a possible loss of capital, the new law also expressly requires monitoring of the solvency, i.e. the liquidity, of the company. If the company is in danger of becoming insolvent, the board of directors must take measures to ensure solvency. If necessary, they must take further measures to restructure the company or propose such measures to the general meeting of shareholders, insofar as they fall within the latter’s competence. They may even have to submit an application for a debt-restructuring moratorium. All steps must be taken with due haste so that insolvency can be prevented as far as possible (Art. 725 CO).

The liquidity must be monitored on an ongoing basis. Contrary to the draft, however, the law does not stipulate that a liquidity plan must be drawn up for this purpose. Neither does the law specify how far into the future liquidity must be monitored or assessed. In the draft, a period of six months, or twelve months in the case of companies that are required by law to have an ordinary audit, was mentioned. This period should nevertheless serve as a guideline.

Limited audit in case of loss of capital, if no auditors in place

Furthermore, if the last annual financial statements show that the assets less liabilities no longer cover half of the sum of the share capital, the statutory capital reserve is not repayable to the shareholders and the statutory profit reserve (so-called capital deficit or capital loss), the board of directors must take measures to eliminate the capital loss or propose corresponding restructuring measures to the general meeting of shareholders, insofar as they fall within the latter’s competence (Art. 725a para. 1 CO).

Under the new law, in the event of a capital deficit, the last annual financial statements must be subjected to a limited audit by a licensed auditor prior to their approval by the general meeting of shareholders if the company does not have elected auditors in place. This is to ensure that the economic situation is not worse than presented by the board of directors. The licensed auditor must be appointed by the board of directors. This auditing obligation is only waived if the board of directors submits an application for a debt-restructuring moratorium. Here, too, it is necessary to act with due haste (Art. 725a para. 2 CO).

If there is reasonable concern that the company’s liabilities are no longer covered by its assets, i.e. that the company may be over-indebted, the board of directors must as before, immediately prepare interim financial statements at going concern values and at liquidation values. However, the interim financial statements at liquidation values can now be waived if the going concern assumption is given and the interim financial statements at going concern values do not show any over-indebtedness. If the going concern assumption is not given, interim financial statements at liquidation values are sufficient (Art. 725b CO).

The board of directors must have the interim financial statements audited by the elected auditors or, in the absence thereof, by a licensed auditor, appointed by the board of directors.

Subordination of claims; time limit for notification of bankruptcy court

If the company is over-indebted according to the two interim financial statements, the board of directors must notify the court which will initiate bankruptcy proceedings.

As before, however, the court does not have to be notified if creditors subordinate and defer their claims (including interest claims) to the extent of the over-indebtedness (Art. 725b para. 4 item 1 CO).

With reference to the bankruptcy case, it is now expressly stated that claims of creditors who have subordinated themselves behind all other creditors are not to be included in the calculation of the company’s loss (Art. 757 para. 4 CO). This new provision is intended to correct the case-law of the Federal Supreme Court, according to which the board of directors is liable for these subordinated claims should the company ultimately become bankrupt. However, this case-law of the Federal Supreme Court is understood differently in doctrine and practice. It is undisputed, however, that subordinations must be taken into account in the calculation of any over-indebtedness but, depending on the circumstances, may be insufficient to stop the financial decline of the company since by their nature they do not constitute a genuine restructuring measure. In such a case, the bankruptcy court must ultimately still be notified. It is therefore questionable to what extent the new legal provision will lead to changes in practice.

Now, the notification of the court may also be omitted as long as there is a reasonable prospect that the over-indebtedness can be remedied within a reasonable period of time, but no later than 90 days after the audited interim financial statements are available, and as long as the claims of the creditors are not additionally jeopardized (Art. 725b para. 4 no. 2 CO). This clarification is to be welcomed, as in practice the question of the urgency of notifying the court arises regularly.

Liability of the board of directors; general meeting of shareholders may decide on legal action by the company

Failure by the board of directors to comply with its duties to act with regard to impending insolvency or loss of capital may result in them being liable (Art. 754 and Art. 756 f. CO). Furthermore, outside of bankruptcy, in addition to the company (i.e. by resolution of the board of directors), the individual shareholders are also entitled to sue for any loss caused to the company, whereby the shareholder’s claim for performance is against the company. However, the board of directors as a whole is unlikely to be particularly motivated to bring an action on behalf of the company against itself or its members, unless the allegations are directed only against individual members of the board. Therefore, the general meeting of shareholders may now decide that the company must file the lawsuit and may entrust its conduct to the board of directors (Art. 756 para. 1 and 2 CO).

Auditors can now only be dismissed for good cause

It is also worth mentioning in this context that, in order to strengthen the position of the auditors, their dismissal under the new company law is now only possible for good cause (Art. 730a para. 4 CO). The reasons that led to the dismissal must be stated in the notes to the annual financial statements (Art. 959c para. 2 item 14 CO).

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

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