The liability of directors

Accepting a directorship is not just a title: it is the assumption of personal liability that can extend to your private assets. In Switzerland the Code of Obligations sets out precisely when, and towards whom, directors are liable. Knowing these boundaries is not a reason to be frightened, but a way to work with the right tools. Let’s look at where liability arises and how it is limited.

The fundamental duties

Every member of the board of directors of an AG — and every managing officer of a GmbH — is bound by two cardinal duties:

• Care: to act with the diligence that can reasonably be expected of a person in the same position, obtaining adequate information before deciding and monitoring how the company is run.
• Loyalty: to pursue the interest of the company, not their own or that of a single shareholder. From this stem the obligations regarding conflicts of interest.

The breach of one of these duties is the precondition for liability. A poor economic result is not enough: what is required is conduct contrary to those duties.

The four preconditions of liability

For civil liability to arise, four elements must coexist:

1. a loss (to the company, the shareholders or the creditors);
2. a breach of duty by the director;
3. a causal link between the breach and the loss;
4. fault, even mere negligence.

If even one of these elements is missing, the claim does not hold. But when they are all present, liability is real and, as a rule, joint and several among the members involved: each may be called to answer for the entire loss, subject to internal recourse.

The business judgment rule

Swiss law recognises that doing business means taking risks. For this reason, entrepreneurial decisions taken in good faith, on an adequately informed basis and free of conflicts of interest enjoy protection: the court does not review them on the merits with hindsight. This is the so-called business judgment rule.

But beware of its limits: it protects how a decision was made; it does not cover those who decide without informing themselves, those who ignore clear signs of a crisis, or those who act in a conflict of interest. The rule rewards a sound decision-making process, not a fortunate outcome.

Towards whom liability runs

Liability can be asserted by different parties:

• the company itself, for the loss it has suffered;
• individual shareholders, for direct or indirect loss;
• the creditors, particularly in bankruptcy, when the company’s assets are not enough to satisfy them.

It is above all in bankruptcy that liability actions become frequent: the bankruptcy administration and the creditors seek to recover the loss caused by negligent management.

The highest-risk moments

Some situations account for the majority of liability cases:

• The financial crisis. In the event of capital loss, risk of over-indebtedness or illiquidity, the board must act promptly: assess the situation, adopt restructuring measures and, if necessary, notify the court. Delay in notifying is one of the most common sources of personal liability. The reform of company law has sharpened the focus on monitoring solvency.
• Unpaid social contributions and taxes. Failure to pay AHV (old-age and survivors’ insurance) contributions withheld from employees can expose the governing bodies to direct liability towards the compensation fund.
• Inadequate information to shareholders and breach of the rules on accounts and audit.
• Conflicts of interest that are neither disclosed nor managed.

The duty of oversight applies to everyone

A dangerous misconception is to think “someone else was handling that file”. The duty of overall oversight applies to the entire board. Not having dealt with a matter, or not having attended meetings, is no excuse: on the contrary, absence and lack of interest can aggravate your position. Anyone who delegates management always retains the duty to supervise the person managing.

How to limit the risk

Liability cannot be eliminated, but it can be governed. The main tools:

• a clear organisational regulation defining delegations and information flows;
• timely financial reporting, with particular attention to liquidity;
• minutes documenting informed decisions and the handling of conflicts;
• scrupulous compliance with accounting and audit obligations;
• directors’ and officers’ liability insurance (D&O), useful but no substitute for good governance;
• the annual discharge by the general meeting, which releases for known facts but does not cover what was concealed.

How we work at SIH ONE

We support boards and managing officers in equipping themselves with the tools that genuinely keep liability in check: regulations, liquidity reporting, early-warning procedures and documentation of decisions. We also step in at critical moments, when timeliness makes the difference between a restructuring and a liability action.

Do you want to understand where you are exposed and shield your role? Discover our legal and tax advisory services and strengthen the protection of your governing bodies.