Capital loss and over-indebtedness in Switzerland: Articles 725–725c CO

The framework under Articles 725–725c

Since the company-law reform effective on 1 January 2023, the Code of Obligations distinguishes monitoring solvency, capital loss, over-indebtedness and revaluation of specified assets. These rules apply to an SA/AG and, by analogy, to an LLC (Sàrl/GmbH).

• Article 725: monitor ability to pay and act when debts falling due may not be met.
• Article 725a: address capital loss when net assets no longer cover half the statutory comparison base.
• Article 725b: prepare and obtain verification of interim accounts where there is justified concern about over-indebtedness.
• Article 725c: regulate revaluation of certain real estate and investments.

A company can lack cash despite positive equity. Conversely, it may still have money in its bank account while total liabilities exceed the value of assets.

Liquidity, capital loss and over-indebtedness

The board must monitor solvency. If it is threatened, it takes measures to safeguard it and any necessary restructuring measures, or proposes measures to the general meeting where they fall within its powers. Where appropriate, it applies for a composition moratorium.

A short-term cash forecast must assess when and how much customers will actually pay, rather than just listing invoices. The difference between profit and cash flow remains important even in an established company.

These duties arise during the financial year, not only after annual accounts are complete. The board must act with due urgency on available information.

Calculate capital loss under Article 725a

Start with the latest annual accounts:

Net assets = assets − liabilities.

Threshold = ½ × (share capital + non-repayable portions of statutory capital reserves and statutory retained earnings).

Identify the actually non-repayable reserves. Adding every reserve in the balance sheet can distort the test. Retained profits and discretionary reserves do not become statutory reserves simply by appearing in equity.

If assets total CHF 250,000 and liabilities CHF 192,000, net assets are CHF 58,000. They no longer cover the CHF 65,000 threshold: there is capital loss. Yet these figures alone do not show liabilities exceeding assets.

With CHF 72,000 net assets, this particular threshold would not be breached. In either case, review liquidity, valuations and recent developments. Nominal share capital is not the same as current equity or cash.

What must the board do after capital loss?

The board takes appropriate measures to end the capital loss. It adopts further restructuring measures where needed, or proposes them to the general meeting when required by the division of powers.

First establish reliable figures: necessary write-downs, recoverable receivables, provisions and complete liabilities. A presentation change without a real improvement does not solve the problem.

Options may concern operations, costs, equity funding or debt waivers, each with accounting, tax and legal effects. A new loan adds cash and an equal liability; it does not by itself restore net assets.

If there is no statutory auditor, the latest annual accounts must undergo a limited examination by a licensed auditor before approval. The board appoints the auditor. This specific obligation ceases if the board applies for a composition moratorium.

An audit opt-out therefore does not remove every examination requirement. The current rule does not require an automatic general meeting solely because the threshold has been crossed: the decisions needed and each body’s powers determine the procedure. Management and the auditor must act promptly.

Interim accounts under Article 725b

Where there is justified concern that liabilities are no longer covered by assets, the board prepares interim accounts immediately, using going-concern and liquidation values.

A recent trial balance is only a starting point. Review receivables, inventory, fixed assets, liabilities, provisions and possible closure costs.

Two statutory simplifications apply:

• If continuation is intended and going-concern accounts do not show over-indebtedness, liquidation-value accounts may be omitted.
• If continuation is no longer intended, liquidation-value accounts suffice.

The statutory auditor, or a licensed auditor appointed where none exists, verifies the accounts. This applies even where no normal annual audit was planned. The auditor also has notification duties in the circumstances prescribed by law.

When must the court be notified?

If the required interim accounts show over-indebtedness, the board must notify the court, subject to the statutory exceptions. Where both valuation bases are prepared, the rule concerns over-indebtedness shown under both.

Example: CHF 180,000 liabilities compared with CHF 150,000 going-concern assets and CHF 115,000 liquidation assets gives shortfalls of CHF 30,000 and CHF 65,000. Do not focus only on the more favourable figure or the remaining bank balance.

Article 725b provides exceptions involving qualifying subordination or a sufficiently substantiated prospect of remedying the over-indebtedness promptly without further jeopardising creditor claims.

The latter is limited to at most 90 days from preparation of the interim accounts. It is not an automatic grace period. Conditions must be met and monitored; waiting 90 days without documented effective measures does not satisfy the rule.

Voluntary company liquidation does not replace these duties when the company is over-indebted.

What does debt subordination achieve?

Qualifying creditors defer their claims and accept ranking behind all other company creditors to the extent of the asset shortfall. The arrangement must also cover interest due throughout the over-indebtedness period.

Subordination can affect the duty to notify the court. It does not cancel the debt, necessarily provide new cash or automatically convert a loan into equity.

Assess amount, interest, duration and conditions against the verified accounts and actual circumstances. A vague shareholder letter saying they “can wait” does not establish compliance.

Continue monitoring after signing. Further losses can increase the shortfall and make the initial arrangement insufficient.

Revaluation under Article 725c

In a capital-loss or over-indebtedness situation, qualifying real estate and investments with actual value above acquisition or production cost may be revalued up to that actual value.

This is not a general permission to revalue all assets. The statutory auditor, or a licensed auditor where none exists, must confirm in writing that the conditions are met.

Present the amount separately within statutory retained earnings as a revaluation reserve. It may be released only in the prescribed cases, including conversion into share or participation capital, a value adjustment or disposal of the revalued asset.

An internally estimated hidden reserve is not sufficient on its own. Review evidence, valuation methods and tax consequences.

Application to a Swiss LLC

Article 820 makes these provisions applicable to an LLC by analogy. The relevant bodies are its management and members’ meeting. Assign preparation, decisions and documentation consistently with its organisation.

1. Update accounts and cash forecasts.
2. Calculate capital loss separately from indicators of over-indebtedness.
3. Prepare interim accounts immediately when required.
4. Appoint the appropriate auditor and document valuations.
5. Approve measures through the competent bodies and monitor execution.
6. Assess court notification and any exceptions promptly with the relevant professionals.

Audit work and management responsibilities remain distinct. Appointing an accountant does not discharge managers or directors from their own duties.

Frequently asked questions