Capital reduction to cover losses (restructuring)

When a company accumulates losses and its balance sheet shows a capital deficit, reducing the share capital becomes one of the most widely used restructuring tools. It is not about returning funds to shareholders: it serves to put the equity structure back in order, absorbing losses that would otherwise remain a burden on the balance sheet. It is a different operation from an ordinary reduction and follows leaner rules, but it must be carried out precisely. Let’s look at how, taking into account the revision of company law in force since 1 January 2023.

What sets a loss-covering reduction apart

The key difference compared with an ordinary reduction is that here no funds leave the company. There is no repayment to shareholders: it is an accounting adjustment that eliminates or reduces the carried-forward losses, realigning the nominal capital with the actual economic substance.

Because there is no outflow of resources, the equity guarantee available to creditors is not affected. For this reason the law provides, for a reduction intended to eliminate a capital deficit, a simplified procedure with creditor protection measures that are less stringent than for an ordinary reduction. The precondition is that the reduction genuinely serves to cover losses: it is not a shortcut that can be used for other purposes.

Why reduce rather than leave the loss on the books

Carrying forward substantial losses has concrete consequences:

• the nominal capital no longer reflects reality and conveys a distorted picture of the company;
• until the loss is absorbed, the company cannot distribute dividends, because there are no available profits;
• significant losses may trigger the obligations linked to loss of capital and, in the most serious cases, to over-indebtedness.

Reducing capital to cover losses cleans up the balance sheet and, where possible, rebuilds a sound base from which to move forward.

The “accordion” operation

The most frequent case in deep restructurings is a reduction combined with a simultaneous increase, the so-called “accordion” operation: the capital is reduced — often down to the legal minimum or even to zero — to absorb the losses, and in the same act it is increased with new contributions that bring the capital back to an adequate level.

It is the typical tool when the old equity has been eroded and fresh capital is needed. Bear in mind that the reduction cannot leave the capital below the legal minimums — CHF 100,000 for the AG and CHF 20,000 for the GmbH — unless it is accompanied by a simultaneous increase that brings it back to the minimum or above.

Creditor protection in the simplified version

Even in a loss-covering reduction the safeguards do not disappear entirely: the law still requires assurances that the operation truly serves to cover a capital deficit and does not disguise a repayment. In practice, the attestation of a licensed auditor becomes decisive, verifying the situation and confirming the preconditions. What is eased, compared with an ordinary reduction, are the creditor information obligations and the requirement to provide security, precisely because the assets guaranteeing them are not reduced in real terms.

The procedure, step by step

1. Accounting statement highlighting the losses to be covered and the capital deficit.
2. Resolution of the meeting (general meeting in the AG, members’ meeting in the GmbH) on the reduction and the amendments to the articles of association, possibly with the simultaneous increase.
3. Auditor’s attestation by a licensed auditor on the preconditions for the reduction.
4. Public deed before the notary, confirming compliance with the conditions and adapting the articles of association.
5. Entry in the commercial register, which makes the operation effective.

Aspects not to underestimate

• Classify the operation correctly: if funds are in fact paid out to shareholders, it is not a loss-covering reduction, and the ordinary procedure with full creditor protection applies.
• Check the capital minimums: falling below the thresholds without a simultaneous increase leads to refusal of the entry.
• Coordinate with the loss-of-capital and over-indebtedness obligations: the reduction is often one piece of a broader restructuring plan, which the board must manage within the deadlines set by law.
• Assess the effect on reserves: absorbing losses affects reserves and capital contribution reserves, with tax consequences too.

In summary

A capital reduction to cover losses is an effective and relatively lean tool, but it depends on one condition: that it truly serves to cover a capital deficit. Setting it up well — correct classification, auditor, notary, any simultaneous increase — is what turns a struggling balance sheet into a clean fresh start.

Do you need to restructure the balance sheet and realign the capital with accumulated losses? SIH ONE’s corporate division structures the operation in compliance with the law and with an eye on the tax consequences.