Situations of Rapid Change

The revision of Swiss company law increases liabilities and responsibilities of non-executive directors

The revision of Swiss company law increases liabilities and responsibilities of non-executive directors

The role of non-executive directors is often sought as an attractive crowning glory of a career in management. It is easily overlooked that the Swiss Code of Obligations (CO) differs from the regulations in e.g. Germany or the Anglo-Saxon area and that the board of directors, unlike the German or Anglo-Saxon supervisory board, does not have a pure supervisory function but actually acts as the highest decision-making body of the company.

This expanded competence comes with increased responsibility. While in other jurisdictions personal liability of the non-executive directors is limited to a few special cases, the Swiss board of directors is personally and collectively liable for social contributions owed by the company as well as responsible for avoiding an over-indebtedness situation of the company. Failure to take appropriate measures against over-indebtedness in a timely manner also leads to liability risks.

The accumulated risk of a company thereby quickly exceeds private assets, and can thus also lead to the private insolvency of board members.

Changes for boards of directors as of 1st January 2023

The risks described are regulated by Art 725 in the Swiss Code of Obligations (CO). With effect from 1 January 2023, this was amended or supplemented in the revision of the company law of 19 June 2019.

With the intention of allowing more flexible instruments in financial crisis situations and to prevent bankruptcy filibustering, the following now applies:

  • The board of directors is responsible for the solvency of the company (Art 725 I). This means ensuring that the company’s liabilities can be serviced within the respective payment deadlines. Obviously, this (non-delegable) responsibility cannot be fulfilled within the framework of quarterly (or half-yearly or once-yearly) meetings with mere strategy discussions before the joint dinner. Rather, the amendment transfers part of the operational responsibility from management to the board of directors. To fulfil this duty, the regular review of the company’s liquidity planning by the board of directors is required. In the past, this was rather required of the company’s CFO.
  • The threat of insolvency is now explicitly addressed (Art 725 II). Here, the board of directors is required to initiate restructuring measures with due haste. Whereas in the past knowledge of an impending financial crisis was merely recorded in the minutes, the new Art 725 II again assigns the initiation of appropriate measures to the board of directors. This shifts at least part of the operational responsibility from the executive board to the board of directors.
  • The obligation of the board of directors to apply for a moratorium under the protection of insolvency proceedings in case of impending insolvency is emphasised under Art 725 para 2.
  • Further additions were made for loss of capital (Art 725a) and impending over-indebtedness (Art 725b). Even if these do not involve a fundamental transformation, the specification is a clear signal that the standards for assessing a critical company situation have been tightened. On the one hand, this serves to protect the business location by making weak companies more likely to be selected; on the other hand, it may lead to a reinterpretation of insolvency proceedings by focusing on the reorganisation of distressed companies, since the obligation to file for insolvency earlier may improve the chances of reorganisation.

Upgrading the honorary office to an active role in corporate governance

The changes presented will permanently change the role of the board of directors. The honorary office among good colleagues is included in the operational supervision of the company processes and thereby upgraded in importance and responsibility. Consequently, the role now requires greater expertise, commitment and time resources. In view of the liability risks, the legislator is showing that it is serious.

This also requires a professionalisation of the boards of directors. Successful CEO experience or a few successful investments are by no means sufficient as the only qualifying features. Separate and special training courses are offered by renowned institutes.

Swift and competent support

The team of Leverage Experts offers fast and competent help for companies in critical situations. We act as appraisers and second opinions, sparring partners for investors and boards of directors, negotiators vis-à-vis banks and creditors, restructuring and reorganisation experts and experienced interim managers in crisis situations.

We create opportunities for action.

When it really matters. On short notice.

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