IMPORTANT: as of January 1, 2023, new legal provisions will apply with the introduction of the new company law. Among other things, the board of directors has a greater responsibility, but the immediate obligation to deposit the balance sheet does not apply if the board of directors takes suitable remedial measures. A detailed overview of the revised company law can be found here .
Many companies make temporary losses in the course of their company history. Be it in the investment phase at the beginning, when there are often no large sales and costs are incurred, or later, perhaps as a result of an economic downturn. As long as there are sufficient assets on the assets side of the company, this Isn’t too problematic.
In order to protect creditors, Article 725 of the Swiss Code of Obligations regulates what to do if a company accumulates losses and is threatened with over-indebtedness. As a member of the board of directors or the owner of a company, it is crucial that the prescribed procedures are known, since non-compliance could result in a liability action under Article 754ff OR and, in the worst case, this liability could even include private assets.
In this article we answer the following questions:
- What is a sub-balance?
- What should you do with an underbalance?
- What is a capital loss?
- What should you do in the event of a capital loss?
- What is over-indebtedness?
- What should you do if you are over-indebted?
- As a board member, what actions should I take in the event of imminent bankruptcy?
- What influence do COVID loans have on the over-indebtedness situation?
- What innovations does the revised company law, introduced in 2023, bring in relation to the restructuring measures?
What is a sub-balance?
A negative balance sheet occurs when the share capital of a company (share capital = participation capital + legal reserves) is no longer fully covered by the assets of the company on the assets side of the balance sheet due to a balance sheet loss.
With proper bookkeeping, you can recognize a sub-balance sheet by the fact that an item “Loss carried forward” or “Loss” is used on the assets side of the balance sheet. In some accounting systems, this is also listed under ‘equity’, which can make the balance sheet difficult to read.
Veb.ch provides a useful Excel template, at the moment only in German language, with which you can use to immediately identify a sub-balance.
What should you do with an underbalance?
An underbalance does not result in any legal measures .
However, it should serve as a warning to the board of directors and management to take prompt, necessary measures to get the company back on track.
What is a capital loss?
According to the law, capital loss represents a so-called “qualified form” (qualifizierte Form) of the sub-balance (Unterbilanz) sheet. A capital loss occurs as soon as half of the share capital of a company (share capital = participation capital + legal reserves) is no longer covered.
What should you do in the event of a capital loss?
According to Art. 725 Para. 1 OR, the board of directors* must take the following measures “immediately”:
- Immediate convening of a (usually extraordinary) general meeting
- to take remedial measures.
It is important to document the measures decided during this Extraordinary General Assembly. If no remedial measures are taken, this decision must also be documented in the log.
* In the GmbH, these duties are the responsibility of the management .
The restructuring measures usually include a whole series of measures that are taken to overcome the company’s crisis.
The most common remedial measures include the following steps:
- Subordination for loans ( Art. 725 Para. 2 OR and Art. 219 SchKG )
- Capital increase ( Art. 650 OR )
- Capital cut ( Art. 732 OR and Art. 650 OR )
In the event of a subordination, a creditor agrees that in the event of the company’s liquidation or bankruptcy, it will refrain from satisfying its claims until the company has paid all remaining liabilities in full. The creditor is usually a shareholder in the company. The subordination must be unconditional and irrevocable for at least as long until the company has a minimum level of equity that allows it to continue in business. The subordination is noted in the balance sheet, in the notes and, if applicable, in the audit report of the company. Loan interest can still be paid, but is treated as a hidden distribution of profits from a tax point of view, with the corresponding tax consequences.
Another popular restructuring measure is the so-called capital cut (Kapitalschnitt). A capital reduction according to Art. 732 OR with a simultaneous capital increase ( Art. 650 OR ) is carried out. The reduction in capital leads to the elimination of the Loss Carryforward, while at the same time fresh, fully paid-up capital is brought in to at least the same extent. From an investor’s point of view, such a capital cut is interesting because, on the one hand, the Loss Carryforwards disappear from the balance sheet (“balance sheet cosmetics”), on the other hand, existing investors usually lose influence in the form of voting rights, since the shares are very often very often cut or completely written off as part of the capital reduction to be written off.
What is over-indebtedness?
Over-indebtedness occurs when the company’s assets no longer cover the borrowed capital. Over-indebtedness usually means that a company is insolvent and thus unable to function.
What should you do if you are over-indebted?
If there is “justified reason” to assume that the losses will gradually no longer cover the entire equity, an interim balance sheet must be drawn up and submitted to an approved auditor for examination” ( Art. 725 Para. 2 OR ).
This interim balance sheet, which shows the company’s financial situation as of the reporting date, is prepared at amortized cost. If the interim balance sheet shows over-indebtedness or if there is no intention of continuing the business, an interim balance sheet for liquidation values must also be prepared. The interim balance must be checked by an approved auditor.
As soon as the auditors determine that there is over-indebtedness, the board of directors must notify the responsible judge. One speaks here of a so-called balance sheet deposit, with which the insolvency proceedings are initiated. After the balance sheet has been deposited, all further steps are carried out in close coordination with the responsible bankruptcy administrator.
It is possible to defer the filing of the balance sheet if short-term remedial measures can be implemented, or if subordination can be agreed to a sufficient extent.
Depending on the circumstances, a bankruptcy judgment can also be circumvented by creditor agreement, for example with (partial) debt cancellation or a deferral of payments. Such so-called ‘estate negotiations‘, are often likely, when the creditors are long-standing suppliers, or customers who would like to continue doing business with the company concerned in the future.
As a board member, what actions should I take in the event of imminent bankruptcy?
First of all, it is essential that you as a board member are aware of your duties. If the board of directors does not comply with the obligations listed in Art. 725 OR , it can be held liable for the damage caused due to liability under company law.
Any resignation from the Board of Directors does not release you from your duties. As a Director, you can in principle still be held responsible for any omissions or misconduct that occurred during your tenure as a Director.
No preference for creditors! As a member of the board of directors, especially if you are also involved in day-to-day operations, as is the case with many family businesses, you know before anyone else that over-indebtedness and the threat of insolvency may be looming. The temptation can be great to give preference to certain creditors or even to “save” your own loans with the last of your money. However, this is strongly discouraged – if this is discovered, you not only have to pay back the money, but can even be prosecuted under certain circumstances.
AHV (social security) contributions must also continue to be paid in the event of imminent insolvency, this is regulated in the federal law on old-age and survivors’ insurance. The board of directors is therefore jointly and severally liable with their personal assets at risk for any outstanding contributions.
BONUS TIP: Be prepared for what’s to come with the 2023 revised company law (see below) and make sure the company has rolling cash planning under control! In addition to Excel, there are modern solutions like Tresio that can help you with this.
What influence do COVID loans have on the over-indebtedness situation?
According to Art. 24 of the Ordinance on the Granting of Credit and Joint Guarantees as a result of the Coronavirus, the credits and loans granted under this Ordinance (the so-called Covid loans) do not have to be taken into account as borrowed capital for the calculation of any over-indebtedness. With this relief, the Federal Council wanted to prevent companies from being automatically sent into insolvency when they took out the Covid loan.
Without an extension by the legislator, this amendment was valid until March 31, 2022 .
What innovations does the revised company law, introduced in 2023, bring in relation to the restructuring measures?
From January 1st, 2023, the revised company law apply in Switzerland. The aim of this revision of company law is to transfer the ordinance against excessive remuneration in listed companies, which came into force on January 1st 2014, into federal law and to improve corporate governance for non-listed companies as well.
With the new company law, OR 725 will also be adjusted. Art. 725 para. 1 of the Swiss Code of Obligations now requires the board of directors to monitor the solvency of the company. In practice, this means that the board of directors needs regular insight into the rolling liquidity planning!
Rolling liquidity planning becomes mandatory with the revision of the law – Tresio automates this task!
With the revised company law, the responsibility for monitoring the solvency of the company lies with the board of directors. The instrument for this is called rolling liquidity planning. Tresio offers connections to all common accounting solutions and largely automates this process in a cost-effective manner.
With continuous liquidity planning, you ensure that your company always remains liquid and meets all financial obligations at all times. Tresio simplifies liquidity planning in SMEs and reporting to the board of directors; automatically mapping the short-term view via interfaces with various accounting systems, and mapping the long-term view on a rolling, continuous basis via the planning data. Subsidiaries are consolidated with just a few clicks, and finance managers have the ability to switch from a monthly view to a weekly, or even daily view at any time.
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