Capital loss and over-indebtedness under Swiss company law: the board's statutory duties
Swiss company law puts the board of directors, rather than the shareholders or the creditors, in charge of recognising a company's financial distress at an early stage. Under Art. 716a para. 1 no. 7 CO, notifying the court in the event of over-indebtedness is one of the board's non-transferable and inalienable duties. The obligations that lead up to that point are set out in a graduated system of warning thresholds, each with its own required response. The revision of company law that entered into force on 1 January 2023 recast these rules significantly: the old single provision of Art. 725 CO was replaced by three separate articles on impending insolvency (Art. 725 CO), capital loss (Art. 725a CO) and over-indebtedness (Art. 725b CO).
The capital loss threshold
Under Art. 725a para. 1 CO, a capital loss exists when the last annual accounts show that assets minus liabilities no longer cover half of the sum of three items: the share capital, the statutory capital reserve that may not be repaid to shareholders, and the statutory retained earnings. The test therefore compares the company's net assets with a protected capital figure, and not equity with share capital alone.
A simple example shows how it works. Take a company with share capital of CHF 100,000 and statutory reserves of CHF 20,000. The protected figure is CHF 120,000, so the warning threshold is CHF 60,000. If accumulated losses reduce net assets to CHF 50,000, half of the protected capital is no longer covered and a capital loss within the meaning of Art. 725a CO exists. The company is still solvent in the balance-sheet sense, because its assets exceed its liabilities, but the law treats the erosion of capital as a signal that the board must act.
The provision before 2023 was worded differently. Former Art. 725 para. 1 CO applied when the last annual balance sheet showed that half of the share capital and the statutory reserves was no longer covered; in that case the board had to convene a general meeting without delay and propose restructuring measures. Earlier financial years and older literature therefore cite "Art. 725 para. 1 CO" for capital loss and "Art. 725 para. 2 CO" for over-indebtedness, which can confuse readers who consult the current text.
What the board must do in case of capital loss
The current law moved the focus from convening a meeting to taking action. Under Art. 725a para. 1 CO, the board must take measures to eliminate the capital loss. Where necessary it must take further restructuring measures or propose them to the general meeting, so far as they fall within the meeting's powers. The mandatory general meeting of the former law no longer applies, which gives the board more flexibility while keeping the responsibility firmly with it.
Typical measures range from operational changes, such as cost reductions, the sale of non-core assets and the renegotiation of contracts, to balance-sheet measures. These include capital increases, the conversion of shareholder loans into equity, waivers of claims by shareholders or related parties, and a reduction of capital combined with a simultaneous increase (the "accordion" procedure under Art. 653q CO). Art. 725c CO also lets the company revalue real estate and participations above acquisition cost, up to their actual value, to eliminate a capital loss or over-indebtedness, subject to confirmation by the auditor and disclosure in the notes.
Art. 725a para. 2 CO adds a control mechanism for companies that have opted out of the statutory audit. If the company has no auditor, the last annual accounts must undergo a limited audit by a licensed auditor appointed by the board before the general meeting approves them. Under Art. 725a para. 3 CO this obligation lapses if the board files an application for a moratorium (Nachlassstundung).
Impending insolvency as a separate warning signal
The 2023 reform also put the company's liquidity on an equal footing with its balance sheet. Under Art. 725 para. 1 CO, the board must monitor the company's solvency. If insolvency threatens, Art. 725 para. 2 CO requires it to take measures to secure solvency and, where necessary, to take further restructuring measures, propose them to the general meeting or file for a moratorium. Art. 725 para. 3 CO requires the board to act with due urgency. A company can therefore be in breach of its duties because of a cash-flow problem even when its balance sheet still shows no capital loss.
Over-indebtedness and the duty to notify the court
The next stage is over-indebtedness. Under Art. 725b para. 1 CO, if there is reason to believe that the company's liabilities are no longer covered by its assets, the board must immediately prepare interim accounts on both a going-concern and a liquidation basis. The interim accounts at liquidation values may be dispensed with if the going-concern assumption applies and the interim accounts at going-concern values show no over-indebtedness. If the going-concern assumption does not apply, interim accounts at liquidation values suffice. Under Art. 725b para. 2 CO the interim accounts must be audited by the company's auditor or, if there is none, by a licensed auditor appointed by the board.
If the audited interim accounts show over-indebtedness on both bases, Art. 725b para. 3 CO requires the board to notify the court. The court will then normally open bankruptcy proceedings unless a moratorium is granted. Art. 725b para. 4 CO allows only two exceptions. The first is where creditors subordinate their claims to those of all other creditors in an amount covering the shortfall (Rangrücktritt); under the current text, the subordination must also cover interest claims for the duration of the over-indebtedness. The second is where there is a well-founded prospect that the over-indebtedness can be eliminated within a reasonable period, at the latest 90 days after the audited interim accounts become available, and the creditors' claims are not additionally endangered. The 90-day window codifies the "reasonable period" that courts had previously granted case by case, and it sets an outer limit that boards must observe.
Where the company has an auditor and the board fails to notify the court despite obvious over-indebtedness, the auditor must notify the court itself under Art. 728c para. 3 CO (ordinary audit) or Art. 729c CO (limited audit).
Liability and practical consequences
Directors who intentionally or negligently breach these duties are personally liable to the company, the shareholders and the creditors for the resulting loss under Art. 754 para. 1 CO. In practice, the most significant exposure arises from delayed notification of over-indebtedness: the longer an over-indebted company continues to trade, the greater the damage to creditors from new liabilities and diminished recoveries in the later bankruptcy. Criminal provisions may also apply, notably mismanagement under Art. 165 SCC.
Boards should therefore document their assessment of the company's financial position, the measures considered and the reasons for the decisions taken. A well-kept record of liquidity monitoring, capital-loss analysis and restructuring decisions is the most effective protection against later liability claims, and it shows that the board acted with the care required by Art. 717 para. 1 CO.
Scope of application
These rules apply directly to the company limited by shares (AG). They also apply to the limited liability company (GmbH) by reference in Art. 820 para. 1 CO, and to cooperatives by reference in Art. 903 CO. For the GmbH, the relevant capital figure is the nominal capital (Stammkapital).
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For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of October 2026.