Posts tagged "insolvency"

Capital Losses, Overindebtedness, and Insolvency under the New Swiss Corporate Law

On January 1, 2023, a revised company law was put into effect, incorporating several adjustments and innovations regarding capital loss, overindebtedness, and insolvency. This article outlines what should be considered.

Keeping track of liquidity

Boards of directors are required to monitor the level of solvency, or liquidity, of companies in danger of insolvency. Alternatively, they can propose such measures to the general meeting of shareholders if further measures are needed. There must be due haste in taking all steps to prevent insolvency. Liquidity must be monitored continuously. This requirement is not included in the law, however, contrary to the draft.

A limited audit is conducted if capital was lost and auditors were not available

Interim financial statements must be prepared both at ongoing concern values and at liquidation values by the board of directors. Over-indebted companies are those whose liabilities exceed their assets. An auditor must conduct a limited audit of the last annual financial statements in the event of a capital deficit under the proposed law.

The time limit for notifying the bankruptcy court of the subordination of claims

As a result of the newly enacted German law, the board of directors is not required to notify the court if creditors are subordinated and deferring their claims (including interest claims) to the extent of the company’s overindebtedness (Art. 725b para. 4 item 1 CO).

According to Art. 757 para. 4 CO, claims of creditors who have subordinated themselves behind all other creditors cannot be considered in calculating the company’s loss in bankruptcy cases. The purpose of this revised provision is to correct the Federal Supreme Court’s case law regarding subordinated claims. This is because it obligates the board of directors in a bankruptcy situation to pay them.

Having a clear understanding of the importance of notifying the court is welcome since this question often arises in practice.

Company directors are liable for company actions; shareholders may vote on legal actions

In the event of impending insolvency or loss of capital, the board of directors may be held liable (Art. 754) for failing to act. Apart from bankruptcy, individual shareholders also have the right to sue the company (e.g. through a resolution of the board of directors) for any loss that the company experiences and the shareholder’s claim for performance is against the company. It is unlikely, however, that the board of directors as a whole will bring a lawsuit against itself or its members on behalf of the company. Except in cases where the allegations are restricted to individual board members. The board of directors or a representative can file a lawsuit based on the decisions made at the general meeting (Art. 756 para. 1 and 2 CO).

Only valid reasons can now be used to dismiss auditors

Under the revised company law, auditors may now only be dismissed for valid cause to strengthen their position (Art. 730a para. 4 CO). Remarks to the annual financial statements should include the reasons for dismissal (Art. 959c para. 2 item 14 CO).