Over-indebtedness: duties of the board

When the accounts worsen, the board of directors cannot simply wait for things to improve. Swiss law, reformed by the revision of company law in force since 1 January 2023, imposes on the board a series of graduated duties that are triggered depending on the severity of the situation: risk of illiquidity, capital loss, over-indebtedness. Knowing them is not theory: ignoring them exposes directors to personal liability. Let’s look at them in order.

First level: solvency

The board has a permanent duty to monitor the solvency of the company, i.e. its ability to meet its obligations as they fall due. If the risk emerges that the company can no longer pay its debts on time, the board must act with urgency, adopting restructuring measures and, if necessary, proposing or preparing more incisive interventions.

This is the level often neglected, because it precedes the accounting loss: a company may be formally in profit and already in liquidity difficulty. The law requires looking at cash flows, not just the balance sheet.

Second level: capital loss

There is a capital loss when the latest balance sheet shows that the assets no longer cover half of the sum of share capital, statutory capital reserve and statutory retained earnings reserve. In this situation the board must:

• adopt measures to remedy the loss, within the scope of its powers;
• where appropriate, propose to the general meeting measures (for example a reduction with a simultaneous increase, new contributions, other restructuring measures).

A practical point often overlooked: if the company has waived the audit (opting-out), in the event of a capital loss the latest annual accounts must nonetheless be submitted for review by a licensed auditor. This is not a formality: it is a safeguard for the reliability of the figures on which decisions are based.

Third level: over-indebtedness

Over-indebtedness (Überschuldung) is the most serious situation: it occurs when the company’s debts are no longer covered by the assets, neither valuing the business as a going concern nor on a liquidation basis. When there is well-founded concern of over-indebtedness, the board must have interim balance sheets drawn up at going-concern values and at realisation (liquidation) values, and have them reviewed by a licensed auditor.

If both interim balance sheets confirm the over-indebtedness, the board is in principle obliged to notify the court (filing of the accounts), unless specific conditions are met that allow it to wait.

Subordination and the ways out

The board can avoid notifying the court, within certain limits, in two situations:

• subordination of claims: some creditors agree to subordinate their claims (principal and interest) to all the others, for an amount that covers the excess debt. Subordination temporarily “freezes” the notification duty, but it does not on its own restore the company to health;
• concrete prospect of restructuring in the short term: if there is a well-founded prospect of eliminating the over-indebtedness within a short period and without further prejudicing the creditors, the board may hold off for that limited time.

These are windows, not doors left open indefinitely. Using them requires documentation, precise timing and a credible plan.

Why timeliness is everything

The central issue in directors’ liability is time. A board that realises too late, that fails to have the interim balance sheets drawn up, that delays notifying the court while the company keeps taking on debt, aggravates the harm to creditors. And harm caused by delay is precisely what can be personally attributed to the directors in liability proceedings.

Acting in time, by contrast, protects everyone: it gives room for a genuine restructuring and shields those in charge from allegations of negligence.

What a board must do concretely

• Monitor liquidity with cash projections, not just the annual balance sheet.
• React immediately to signs of capital loss, assessing measures and a review of the accounts.
• At the first well-founded concern of over-indebtedness, have the interim balance sheets drawn up and reviewed.
• Assess subordination or restructuring prospects on documented and realistic grounds.
• Document every decision and every assessment: minutes and analyses are the proof of diligence.

How we work at SIH ONE

We support boards of directors in reading the signs of crisis, in preparing the interim balance sheets and in choosing between subordination, restructuring measures and notice to the court, with the aim of protecting the company and shielding directors from avoidable liability. Is your company going through a difficult phase? Turn to the tax-legal division and address the situation at the right time.