Few phrases put a Swiss board on edge like "capital loss" and "overindebtedness". Both come from Art. 725 ff. CO, the provisions that tell a board of directors what it must do when the company's finances deteriorate. The mechanics are technical, but the underlying logic is simple: the worse the balance sheet looks, the more the law shifts the board's attention from shareholders to creditors. Here is what the concepts mean, what they trigger, and what a board can realistically do — without the jargon.

Three stages, one direction

The law distinguishes three stages of financial distress, each with its own duties.

The first is the threat of insolvency: a real risk that the company will be unable to pay its debts as they fall due. This is a cash-flow question, not an accounting one. A company can be profitable on paper and still hit this stage, because receivables arrive late and payroll does not wait.

The second is capital loss. The balance sheet shows that net assets no longer cover a legally defined portion of the share capital and statutory reserves. The company may still be paying its bills, but the equity cushion that protects creditors has been eaten by accumulated losses.

The third is overindebtedness: liabilities exceed assets. Economically, the company is now operating on its creditors' money. This is the stage the law treats most severely.

The duties each stage triggers

When solvency is threatened, the board must monitor the liquidity situation and take measures to secure it — with urgency, and where necessary by initiating a broader restructuring. This duty sits with the board itself; it cannot simply be delegated to management and forgotten.

At capital loss, the board must take measures to remedy the situation. The law also tightens the scrutiny of the accounts: even companies that have opted out of an audit must have the relevant financial statements reviewed.

At overindebtedness — or already on a well-founded concern of it — the board must prepare interim financial statements at both going-concern and liquidation values. If those statements confirm that creditors' claims are no longer covered, the board must in principle notify the court, the step that opens insolvency proceedings. The law recognises two ways out: creditors can subordinate enough of their claims to close the gap, or there is a realistic prospect of curing the overindebtedness within a short period. How short is a question of fact, not of hope.

The board's realistic options

The options are broader than most boards fear, and narrower than most boards wish. In practice they cluster around a handful of moves:

  • Fresh equity from existing shareholders or new investors. The cleanest cure, but it requires people who still believe in the business — and time to convince them.
  • Subordination of claims (Rangrücktritt). Creditors — often shareholders or group companies — agree that their claims rank behind all others. This can avert the court notification, but it adds no cash. It buys time; it is not a restructuring.
  • Restructuring the liabilities: waivers, extensions or debt-to-equity conversions negotiated with key creditors.
  • Selling assets or business units to generate liquidity and refocus the company on a viable core.
  • A court moratorium (Nachlassstundung), which provides protected breathing room to negotiate with creditors.
  • An orderly notification of the court. Sometimes this is the responsible option — continuing to trade while hopelessly overindebted is how personal liability grows.

Which combination is realistic depends entirely on the numbers, the creditor landscape and the time available. There is no generic answer.

Where boards go wrong

The most common mistake is waiting for certainty. The duties in Art. 725 ff. CO are triggered by well-founded concern, not by proof. Boards that wait for audited year-end accounts to confirm what the monthly reporting has been signalling for two quarters have usually given away their best options.

The second mistake is treating a subordination as a solution. It removes the immediate notification duty; it does not stop the cash burn that created the problem.

The third is thin documentation. If matters end badly, the board's personal exposure will be judged on what it knew, when it knew it, and what it decided to do. Minutes that show timely, informed, reasoned decisions are the board's best protection.

What to do when the numbers turn

Get reliable, current figures — a board cannot discharge duties it cannot see. Ask for a written assessment of which stage the company is actually in and what that stage triggers. Then decide, and record the decision. Much in this area genuinely depends on the facts of the individual case; general principles only take you to the door. If your company is approaching any of these stages, we are happy to discuss what the numbers mean in your specific situation.