Capital loss and over-indebtedness: what the board of directors must do now
Since the revised Swiss company law of 2023, clear duties apply to the AG and GmbH as soon as finances get tight. If you know them, you can act early. If you overlook them, you may be personally liable.
- Under the revised Swiss company law in force since 2023, the board of directors must monitor the company's solvency on an ongoing basis, not just at the year-end close.
- A capital loss exists when equity covers less than half of the share capital, the statutory retained earnings and the non-repayable statutory capital reserve. If the company has no auditor, its annual financial statements must then be audited nonetheless.
- In the event of over-indebtedness, the board must notify the court, unless subordination agreements are in place or the over-indebtedness can reasonably be expected to be remedied within 90 days.
Three stages, three duties
Since 2023, the Swiss Code of Obligations (CO) has distinguished three situations, which often occur one after the other. The rules apply to the AG and, by cross-reference, also to the GmbH, where they apply to the managing directors.
| Situation | How you recognise it | What needs to be done |
|---|---|---|
| Impending insolvency (Art. 725 CO) | Cash will foreseeably not be enough to pay the bills of the coming months | Take measures with due urgency and, if necessary, consider further steps up to a debt-restructuring moratorium |
| Capital loss (Art. 725a CO) | Equity covers less than half of the share capital and statutory reserves | Take restructuring measures; without an auditor, have the last annual financial statements audited |
| Over-indebtedness (Art. 725b CO) | Liabilities are no longer covered by assets | Prepare interim accounts and have them audited; if over-indebtedness is confirmed, notify the court |
The duty that is often forgotten
What is new is above all the first stage. The board must monitor solvency, and do so on an ongoing basis. A look at the annual financial statements in spring is not enough. In practice this means a cash plan that covers at least the coming months and is updated regularly.
Board members who neglect this duty may be personally liable if creditors later suffer a loss. In the article Cash flow planning for SMEs, I describe what such a plan looks like in an SME with little effort.
Calculating a capital loss
The calculation is based on the share capital of the AG or the nominal capital of the GmbH, the statutory capital reserve to the extent it may not be repaid to shareholders, and the statutory retained earnings. If equity is below half of this total, there is a capital loss.
- Share capital
- CHF 100,000
- Statutory retained earnings
- CHF 20,000
- Half of the total
- CHF 60,000
- Equity after a loss-making year
- CHF 55,000
- Result
- Capital loss
A new consequence applies to companies that have opted out of having an auditor: before the general meeting approves them, their last annual financial statements must nonetheless undergo a limited audit by a licensed auditor. The board appoints the auditor. The audit is not required if the board files an application for a debt-restructuring moratorium.
Does your company have a capital loss?
Enter the figures from your latest balance sheet. The calculation does not replace an audit, but it shows where you stand.
With over-indebtedness, every day counts
If there is reasonable concern that liabilities are no longer covered, the board must immediately prepare interim accounts, at going-concern values and at liquidation values. The accounts at liquidation values may be omitted if the business can continue as a going concern and the accounts at going-concern values do not show over-indebtedness. The interim accounts must be audited. If the company is over-indebted according to both, the court must be notified.
The board may refrain from doing so in only two cases:
- Subordination: Creditors, usually the shareholders themselves with their loans, subordinate their claims to those of all other creditors to the extent of the over-indebtedness and defer them. The subordination must cover the amount and interest for the duration of the over-indebtedness. Older agreements without interest should be amended.
- Reasonable prospect of restructuring: The over-indebtedness can be remedied within a reasonable period, no later than 90 days after the audited interim accounts are available, and creditors' claims are not additionally put at risk as a result.
A subordination that meets these requirements is legally sufficient to refrain from notifying the court. But it only buys time and restructures nothing. The board's duty to take measures remains.
Possible restructuring measures
- Cut costs and close unprofitable areas
- Collect receivables faster and negotiate payment terms with suppliers
- Convert shareholder loans into equity
- Inject new equity or bring in an investor
- Realise hidden reserves, for example by selling assets that are not needed
- Clarify the tax consequences of a capital increase or a debt waiver in advance
Personal liability
Board members are personally liable for losses caused by a breach of their duties (Art. 754 CO). In addition, they are liable for unpaid AHV social security contributions of the company. Acting early, documenting and keeping an eye on liquidity significantly reduces this risk. Record decisions and investigations in minutes. If the worst happens, they show that the board fulfilled its duties.
This article provides a general overview as of October 2026. It does not replace advice on your specific situation. If over-indebtedness is looming, bring in an expert quickly.
Sources: Swiss Code of Obligations, Art. 725 to 725c, 754 and 820 · KPMG: new restructuring law, new duties for the board (German)
Igor Pavlovic is a fiduciary and auditor in Lucerne, Switzerland. He advises business owners and wealthy private individuals on tax, succession and audit, including cross-border matters.