Daily new developments, information & more ensure that the financial sector never stands still either. However, in order for the legal framework conditions to adequately reflect economic realities and requirements, revisions are also needed here. And precisely such a revision will soon affect stock corporation law. While new regulations such as gender quotas for listed companies and the transparency requirements for raw material companies have already been in force since 1 January 2021, most of the changes will come into force on 1 January 2023. The revised stock corporation law will bring about changes in how capital loss and over-indebtedness are handled.
Capital losses & over-indebtedness
Temporarily posting red figures or losses is a reality for many companies. This possibility arises in particular when founding a company or as a consequence of inflation. To ensure the best possible protection for creditors, the Swiss Code of Obligations regulates in Article 725 how companies must act in a loss situation. In the stock corporation law reform, the situation and measures for companies in distress are subdivided again.
- Art. 725 nCO – impending illiquidity
- Art. 725 nCO – capital loss
- Art. 725 nCO – over-indebtedness
- Art. 725 nCO – revaluation of real estate and participations
Members of the Board of Directors as well as company owners are advised to familiarize themselves with the prescribed procedures. Failure to comply with the new rules may result in a liability claim pursuant to Art. 754 et seq. CO.
In connection with capital losses and over-indebtedness, there are four areas that those responsible should look at more closely. Below we have summarized the most important changes for you.
Duties of the Board of Directors in the event of impending illiquidity
Until the end of 2022, the law imposes a concrete duty to act on the Board of Directors (BoD) only in the event of a capital loss. This will change in 2023. The revised stock corporation law states that the Board of Directors is obliged to monitor the company’s ability to pay and, in the event of impending illiquidity, to take action with due haste (Art. 725 nCO). Restructuring measures that go beyond this only have to be submitted to the general meeting (GM) if they fall within its remit. This applies, for example, to a capital increase. In this context, the legislator also explicitly refers to a debt-restructuring moratorium.
EXCURSUS: What does “with due haste” mean?
This refers to the case law developed by the Federal Supreme Court on the postponement of bankruptcy. The BoD is granted the time needed to create restructuring measures and, if necessary, to submit these to the GM – provided that there is a justified prospect of effective and sufficient measures. If this opportunity is not taken, there is no reason for delay and, as before, the BoD must act without undue delay.
Convening a restructuring general meeting
If the assets minus liabilities do not cover at least half of the sum of share capital, legal retained earnings and legal reserves that may not be repaid to shareholders, the Board of Directors must take measures to eliminate the capital loss. Whether this situation exists is determined on the basis of the most recent annual financial statements. Until the end of 2022, the BoD of a company was obliged to immediately convene a general meeting in the event of a half capital loss. With the revised stock corporation law, this legal requirement will be relaxed as of 2023. The convening of a restructuring general meeting will no longer be mandatory if the measures do not fall within the competence of the GM.
In contrast, a company without an auditor (with opting-out) will in future have to subject its most recent annual financial statements to a limited audit in the event of a half capital loss (Art. 725a para. 2 nCO). In such a case, the licensed auditor is appointed by the Board of Directors. The audit requirement may also lapse if the BoD submits an application for a debt-restructuring moratorium.
Calculation of the half capital loss
The revision of stock corporation law also provides greater clarity on how to calculate the half capital loss. Whereas it was previously unclear whether 50% of all legal reserves or only blocked legal reserves should be taken into account, the revision now brings clarity. A half capital loss exists from 2023 onwards if, in the most recent annual financial statements, half of the share capital, participation capital and non-distributable legal reserves is not covered. It is therefore clear for the future that only the non-distributable legal reserves have to be taken into account (Art. 725a para. 1 nCO).
Deadline for notification of over-indebtedness
The definition of over-indebtedness will not change with the revision of stock corporation law. What will change, however, is that the interim financial statements in the event of suspected over-indebtedness must only be prepared at going-concern and liquidation values if continuation of the company is expected. If this assumption does not apply, the interim financial statements can be prepared at liquidation values. If the assumption does apply, the interim financial statements at liquidation values can be omitted.
The BoD then has the interim financial statements audited by an auditor – if one exists – or by a licensed auditor. After the interim financial statements have been audited, notification of over-indebtedness must be submitted to the court within 90 days. This submission can only be omitted if there is a prospect of eliminating the over-indebtedness within this period.
In this context, it should also be borne in mind that, under the new stock corporation law, notification of over-indebtedness can only be averted by subordination if creditors subordinate not only the loan liabilities but also the due and future interest.