Swiss company law, as revised on 1 January 2023, places three distinct duties on the board of directors: monitor solvency and act if it is at risk (art. 725 CO), take measures as soon as net assets no longer cover half of the share capital and the non-refundable statutory reserves (art. 725a CO), and, where the company is over-indebted, draw up interim financial statements and notify the court unless claims are subordinated or the deficit is cured within 90 days (art. 725b CO). The same rules apply to a limited liability company (art. 820 CO). Capital loss and over-indebtedness are two separate thresholds with very different consequences.
Contents
- Three thresholds, three distinct duties
- Calculating capital loss: method and worked figures
- Interim financial statements at two values
- Notifying the court: timing and the two exemptions
- Revaluing land and participations (art. 725c CO)
- Limited liability companies: the same rules by analogy
- Director liability and the duty to act promptly
- The undercapitalised Swiss subsidiary of a foreign group
- Where Swiss rules differ from UK and US practice
- Restructuring, moratorium, liquidation or bankruptcy
- Worked example: a Lucerne company in capital loss
Three thresholds, three distinct duties
The revision of Swiss company law replaced the former article 725 CO with a three-stage escalation. Each threshold triggers a different duty, and confusing them is expensive: acting early is never held against a board, acting late exposes its members personally.
| Threshold | Trigger | Duty of the board of directors |
|---|---|---|
| Threatened insolvency (art. 725 CO) | The company risks being unable to pay its debts as they fall due | Monitor solvency, take measures to secure it, propose further restructuring measures to the general meeting where these fall within its powers, and apply for a composition moratorium where appropriate |
| Capital loss (art. 725a CO) | Assets after deduction of liabilities no longer cover half of the share capital and the non-refundable statutory reserves | Take measures to remedy the loss; have the annual accounts reviewed by a licensed auditor if the company has no statutory auditor |
| Over-indebtedness (art. 725b CO) | Good cause to believe that liabilities are no longer covered by assets | Immediately draw up interim financial statements at going concern values and at liquidation values, have them audited, and notify the court unless an exemption applies |
Source: articles 725 to 725b of the Swiss Code of Obligations, in force since 1 January 2023.
The first threshold is a question of cash, the second a question of equity, the third a question of asset coverage. A company can cross the first without ever reaching the second, and the reverse is equally true: a well capitalised company can run out of liquidity, and a debt-free company can report a capital loss.
Calculating capital loss: method and worked figures
The formula is precise. A capital loss exists where the last annual accounts show that assets, after deduction of liabilities, no longer cover half of the sum of the share capital, the statutory capital reserve and the statutory retained earnings that are not refundable to shareholders (art. 725a para. 1 CO).
Three items therefore make up the calculation base: the share capital, the statutory capital reserve and the statutory retained earnings, excluding any portion that would be refundable. The threshold is half of that sum.
| Item | Company A, in CHF | Company B, in CHF |
|---|---|---|
| Share capital | 100,000 | 100,000 |
| Statutory capital reserve and retained earnings | 30,000 | 30,000 |
| Calculation base | 130,000 | 130,000 |
| Threshold, half the base | 65,000 | 65,000 |
| Total assets | 250,000 | 264,000 |
| Total liabilities | 192,000 | 192,000 |
| Net assets | 58,000 | 72,000 |
| Position | Capital loss: 58,000 is below 65,000 | No capital loss: 72,000 exceeds the threshold |
Illustrative figures. Capital loss is established on the last annual accounts, not on an interim position.
Two practical consequences follow. First, a capital loss is not over-indebtedness: company A remains solvent on a balance sheet basis, its assets comfortably cover its liabilities. Second, the test is applied to the last annual accounts, which means that a company whose position deteriorates during the year may be in capital loss without anyone having formally established it, until the accounts are closed.
Important
Where the company has no statutory auditor, the last annual accounts must undergo a limited audit by a licensed auditor before they are approved by the general meeting (art. 725a para. 2 CO). The board of directors appoints that auditor. The duty falls away if the board applies for a composition moratorium (art. 725a para. 3 CO). Many companies that have opted out of the audit requirement are unaware that a capital loss revives an audit obligation.
Interim financial statements at two values
Over-indebtedness is established on interim financial statements, not on an impression. Where there is good cause to believe that the company’s liabilities are no longer covered by its assets, the board of directors must immediately draw up interim financial statements at going concern values and at liquidation values (art. 725b para. 1 CO).
When one set of accounts is enough
The law allows two simplifications. The statements at liquidation values may be dispensed with where the company is expected to continue as a going concern and the statements at going concern values show no over-indebtedness. Conversely, statements at liquidation values alone suffice where the company is no longer expected to continue trading (art. 725b para. 1 CO). In every other case both sets are required, and the duty to notify the court arises only if both sets show over-indebtedness (art. 725b para. 3 CO).
The difference between the two values
Going concern values assume that the business continues: assets are measured by their usefulness to a working enterprise. Liquidation values assume that it stops: machinery sold second hand, inventory discounted, intangibles frequently written down to zero, and provisions booked for closure costs and severance. The gap between the two sets is usually wide, and that gap is exactly what the legislator wants to see.
The audit
The board of directors must have the interim financial statements audited by the statutory auditor or, where there is none, by a licensed auditor whom it appoints (art. 725b para. 2 CO). Where the company has no statutory auditor, the licensed auditor assumes the mandatory notification duties that would fall on an auditor conducting a limited audit (art. 725b para. 5 CO).
Notifying the court: timing and the two exemptions
If both sets of interim financial statements show that the company is over-indebted, the board of directors must notify the court. The court will either open bankruptcy proceedings or proceed under article 173a of the Debt Enforcement and Bankruptcy Act, that is, postpone its decision where immediate restructuring or a composition agreement appears possible (art. 725b para. 3 CO).
Two exemptions, and only two, relieve the board of that duty.
First exemption: subordination of claims
Notification is not required where creditors subordinate claims to the extent of the capital shortfall, agreeing that they rank behind all other claims of the company, provided the subordination also covers the interest owed for the entire duration of the over-indebtedness (art. 725b para. 4 no. 1 CO).
Three conditions hide inside that sentence, and each of them causes agreements to fail in practice:
- The subordination must cover the full amount of the shortfall, not a token sum.
- It must extend to the interest accruing throughout the period of over-indebtedness, which agreements drafted in haste routinely omit.
- It must be granted by actual creditors, in a signed and dated document capable of being produced in a later review.
Subordination does not extinguish the debt: it ranks it behind the others. It improves neither liquidity nor profitability, it merely suspends the duty to notify. A company kept alive by a subordination agreement without operational recovery remains over-indebted.
Second exemption: cure within 90 days
Notification is also not required for as long as there is good cause to believe that the over-indebtedness can be cured in good time, and in any event within 90 days of the interim financial statements being drawn up, and that the recovery of claims is not further compromised (art. 725b para. 4 no. 2 CO).
Those 90 days are an absolute ceiling, not an entitlement. The period runs from the date the interim statements are prepared, not from the date the problem was discovered. The “good cause” must rest on verifiable elements: a signed recapitalisation commitment, a letter of intent from an investor, a signed contract producing certain revenue. Commercial optimism is not enough.
My Swiss Company advice
Date and document every step: the day the warning signs appeared, the date the interim statements were drawn up, the date of the audit, the date each measure was decided. In a liability claim, the question put to directors is never “did you know?” but “from what point did you know, and what did you do in the days that followed?”. A dated board minute is worth far more than a reconstruction after the event.
Revaluing land and participations (art. 725c CO)
Swiss law offers one accounting lever that is often overlooked. Where a capital loss under article 725a or over-indebtedness under article 725b exists, land or participations whose true value exceeds their acquisition or production cost may be revalued up to that true value at most. The revalued amount must be shown separately within the statutory retained earnings as a revaluation reserve (art. 725c para. 1 CO).
The mechanism is tightly controlled:
- It is available only for land and participations, and for no other asset class.
- It requires the statutory auditor, or failing that a licensed auditor, to confirm in writing that the statutory conditions are met (art. 725c para. 2 CO).
- The revaluation reserve may be released only by conversion into share capital or participation capital, by a value adjustment, or by disposal of the revalued assets (art. 725c para. 3 CO). It is therefore not distributable.
In a group holding a historically undervalued participation, this lever can sometimes lift the company out of a capital loss without fresh money. It creates no liquidity, however: it corrects an accounting picture, it does not solve an inability to pay.
Limited liability companies: the same rules by analogy
The company law provisions on threatened insolvency, capital loss and over-indebtedness, together with the revaluation of land and participations, apply by analogy to the limited liability company, the Swiss Sàrl or GmbH (art. 820 CO). Its managing officers therefore carry exactly the duties described above, with the same requirement of urgency.
The calculation base for the capital loss is then read against the company’s nominal capital and statutory reserves. One feature deserves attention: where the articles of association provide for additional capital contributions, the obligation to pay them up can serve as a restructuring resource, but it presupposes a resolution and a pre-existing provision in the articles. It cannot be improvised once over-indebtedness has arrived.
Director liability and the duty to act promptly
The law repeats the same requirement three times: the board of directors acts with the requisite urgency (art. 725 para. 3 CO); the board of directors and the auditor or licensed auditor act with the requisite urgency (art. 725a para. 4 CO); the board of directors, the auditor or the licensed auditor act with the requisite urgency (art. 725b para. 6 CO). That insistence is not rhetorical: delay is the central allegation in every liability claim.
Members of the board of directors and all persons engaged in the management or liquidation of the company are liable, both to the company and to each shareholder and company creditor, for any losses caused by an intentional or negligent breach of their duties (art. 754 para. 1 CO). The loss typically claimed is the increase in the deficit between the moment notification should have been given and the moment it actually was.
A person who lawfully delegates a function to another body remains liable for losses caused by that body unless they can prove that they took all due care in selecting, instructing and supervising it (art. 754 para. 2 CO). Outsourcing the bookkeeping does not transfer the duty of supervision.
The undercapitalised Swiss subsidiary of a foreign group
This is the most frequent configuration in the files we handle, and the one where group reflexes collide with Swiss law.
Intercompany funding is not capital
A Swiss subsidiary funded by advances from its parent often shows a balance sheet with thin equity and substantial intragroup liabilities. For as long as those advances are booked as debt, they count in the over-indebtedness test like any other liability. A group that treats such advances as “capital in practice” is applying the wrong framework: only a formal subordination, or a genuine capital increase, changes the legal position. Reading that position correctly starts with accounts kept to Swiss standards, which is part of our administration services for Swiss companies.
Subordinating the shareholder loan
Subordinating the parent’s claim is the fastest and least expensive measure. It must meet the conditions of article 725b para. 4 no. 1 CO, including coverage of interest for the entire duration of the over-indebtedness. It must be signed by an authorised representative of the creditor, which sometimes requires a formal decision at group level: that lead time needs to be anticipated.
Recapitalisation and debt waiver
Two further routes exist. Recapitalisation, by increasing the share capital or by contributing to the capital contribution reserves, strengthens the balance sheet durably; where correctly declared, capital contribution reserves can later be repaid free of Swiss withholding tax. A debt waiver removes the liability but produces accounting income at subsidiary level, with tax consequences to be assessed before signature, in particular regarding the use of tax loss carry-forwards. The choice between these three options is not only legal: it determines what remains inside the company and what the exit will cost.
Important
A group instruction to “keep going for one more quarter” never suspends the duties of the Swiss corporate bodies. A director or managing officer resident in Switzerland who follows such an instruction while the interim financial statements establish over-indebtedness incurs personal liability and cannot rely on the shareholder’s wishes as a defence. This is the point to settle in writing between the group and its local representatives, before the crisis.
Where Swiss rules differ from UK and US practice
Directors appointed from a common law background frequently apply the wrong mental model to a Swiss balance sheet. Three differences matter most.
First, Swiss law works on defined balance sheet thresholds, not on a general standard of behaviour. English wrongful trading under section 214 of the Insolvency Act turns on whether a director ought to have concluded that insolvent liquidation was unavoidable, which leaves room for argument. Articles 725a and 725b CO ask an arithmetical question: do net assets cover half the capital base, and do assets cover liabilities. The answer is produced by the accounts, and the interim statements make it verifiable.
Second, there is no Swiss equivalent of Chapter 11 as a management tool. A composition moratorium under the Debt Enforcement and Bankruptcy Act is granted by a court, supervised by a commissioner, and provisional relief is limited to four months, extendable by a further four. It is not a strategy that management enters and exits at will, and it becomes public.
Third, a parent company letter of comfort has no automatic effect. Whatever assurance it gives to auditors in other jurisdictions, it does not satisfy article 725b para. 4 CO unless it takes the form of a subordination meeting the statutory conditions, or unless it evidences a cure achievable within 90 days. A comfort letter that is not legally binding leaves the Swiss directors exactly where they were.
Restructuring, moratorium, liquidation or bankruptcy
Once the diagnosis is established, four routes are available, and the choice is made on objective criteria.
- Restructuring where the business is viable and the financial problem is temporary: recapitalisation, subordination, revaluation under article 725c, cost reduction, disposal of non-essential assets. Our article on corporate restructuring in Switzerland covers the legal and tax aspects.
- A composition moratorium where restructuring requires an arrangement with creditors: the court grants a provisional moratorium of up to four months, extendable by four, and orders the measures needed to preserve the company’s assets (art. 293a DEBA). The board of directors may itself file that application under article 725 para. 2 CO.
- Voluntary liquidation where the business has no future but assets still cover liabilities: it is the cleanest exit, and it remains available only while that coverage exists. Our guide on how to liquidate a company in Switzerland sets out the steps.
- Notification to the court where over-indebtedness is established and no exemption applies. This is not a governance failure: it is the performance of a legal duty, and it is what protects the directors. Our article on bankruptcy of a Swiss company explains what follows.
Worked example: a Lucerne company in capital loss
A company limited by shares based in Lucerne, with share capital of CHF 100,000 and statutory reserves of CHF 30,000, closes its financial year with assets of CHF 250,000 and liabilities of CHF 192,000. Net assets stand at CHF 58,000, below the CHF 65,000 threshold: the capital loss is established at the closing.
The company had opted out of the audit requirement. The first effect of the capital loss is therefore procedural: the annual accounts must undergo a limited audit by a licensed auditor before the general meeting approves them (art. 725a para. 2 CO). The board appoints that auditor and convenes the meeting with a report on the measures contemplated.
Three measures are examined. Subordinating the shareholder’s claim of CHF 60,000 is not relevant here: there is no over-indebtedness, only a capital loss, and subordination does not restore equity. Revaluing a participation carried at CHF 40,000 with a true value of CHF 95,000 is available under article 725c CO, subject to written confirmation by the licensed auditor: it brings net assets to CHF 113,000, above the threshold. A capital increase of CHF 50,000 would achieve the same result and add cash.
The company chooses the revaluation, which is faster, and starts a cost reduction programme in parallel. The board documents the decision, obtains the written confirmation, and shows the revaluation reserve separately within the statutory retained earnings. Had the position deteriorated into over-indebtedness, the revaluation would only have bought time: it creates no cash.
FAQ: capital loss and over-indebtedness under Swiss law
What does article 725 of the Swiss Code of Obligations require?
In its version in force since 1 January 2023, article 725 CO requires the board of directors to monitor the company’s solvency. If the company risks becoming insolvent, the board must take measures to secure solvency, take or propose to the general meeting further restructuring measures where these fall within the meeting’s powers, and apply for a composition moratorium where appropriate. It must act with the requisite urgency. Capital loss is dealt with in article 725a and over-indebtedness in article 725b.
What is the difference between capital loss and over-indebtedness?
Capital loss is a weakening of equity: net assets no longer cover half of the share capital and the non-refundable statutory reserves, but they still cover the liabilities. Over-indebtedness is more serious: liabilities are no longer covered by assets. Capital loss requires remedial measures and, where there is no statutory auditor, a limited audit of the annual accounts. Over-indebtedness requires audited interim financial statements and, unless an exemption applies, notification to the court.
When must the board notify the court?
As soon as both sets of interim financial statements, prepared at going concern values and at liquidation values and duly audited, show that the company is over-indebted (art. 725b para. 3 CO). Two exemptions apply: a subordination of claims covering the capital shortfall and the interest owed throughout the period of over-indebtedness, or good cause to believe that the over-indebtedness will be cured within 90 days of the interim statements being drawn up, without the recovery of claims being further compromised.
Is a parent company comfort letter sufficient?
Not on its own. Article 725b para. 4 CO recognises only two exemptions: a subordination of claims meeting the statutory conditions, or a cure achievable within 90 days. A comfort letter that is not legally binding satisfies neither. To have effect in Switzerland, parent support must take the form of a signed subordination covering the shortfall and the interest, a binding recapitalisation commitment, or an actual payment. This is one of the most frequent misunderstandings among foreign groups with a Swiss subsidiary.
Do these rules apply to a Swiss limited liability company?
Yes. The company law provisions on threatened insolvency, capital loss, over-indebtedness and the revaluation of land and participations apply by analogy to the limited liability company (art. 820 CO). Its managing officers carry the same duties as the board of directors of a company limited by shares, including the requirement of urgency and the duty to notify the court.
Does a company without a statutory auditor still need an audit?
Yes, in two situations. Where there is a capital loss, the last annual accounts must undergo a limited audit by a licensed auditor before approval by the general meeting (art. 725a para. 2 CO). Where over-indebtedness is suspected, the interim financial statements must be audited by a licensed auditor appointed by the board (art. 725b para. 2 CO), who then assumes the mandatory notification duties of an auditor (art. 725b para. 5 CO). Opting out of the audit requirement does not remove every form of review.
Sources
Conclusion
Articles 725 to 725c CO do not penalise financial difficulty, they penalise inaction. A board that monitors solvency, draws up interim financial statements at the first serious warning signs, has its figures audited and documents its decisions remains within its role, even if the company is ultimately liquidated or declared bankrupt. A board that waits for the next year end to record what it already knew is personally exposed.
My Swiss Company SA, a Swiss corporate services provider with offices in Geneva and Lucerne and a registered address in Zug, assists companies limited by shares and subsidiaries of foreign groups with reading their accounts, preparing interim financial statements, and choosing between restructuring, a composition moratorium and liquidation. To review your position, speak to our expert.
