Who is Involved?
Each formally elected director and all persons engaged in the management or liquidation of the company are personally, on a joint and several basis, liable to the company, the individual shareholders and the company’s creditors for any losses or damage caused intentionally or negligently by default of their duties.
Whoever delegates the fulfilment of a duty to another corporate body in accordance with the relevant provisions of Swiss corporate law is liable for any damages caused by it unless he or she proves that the necessary care in selection, instruction and supervision was applied under the circumstances.
Directors’ Duties Pre-Insolvency
In insolvency situations, the duties and responsibilities of directors are no longer to protect the interest of the company, but to safeguard the interest of the creditors of the company. Swiss law further explicitly deals with the directors ‘duties in case of loss of capital and/or over-indebtedness.
If the last annual balance sheet shows that half of the share capital and the legal reserves are no longer covered by the net asset value (at going concern value) of the company, the board of directors shall without delay call a general meeting of shareholders and propose adequate measures for restructuring. Options for restructuring available shall be discussed upon a better understanding of the financial situation of the individual Swiss companies concerned.
Notification of the Judge in the Case of Over-Indebtedness
A very critical phase is reached once the corporate debtor is actually threatened with over-indebtedness. In case of substantiated concern of over-indebtedness an interim balance sheet must be prepared and submitted to the company’s auditors for examination. If the interim balance sheet shows that the claims of the creditors are neither covered if the assets are appraised at ongoing business values nor at liquidation values, then the board of directors is obliged to notify the bankruptcy or composition court. There are two exceptions to this:
- No notification is required if creditors subordinate their claims to the claims of all other creditors in the amount of the over-indebtedness;
- The board of directors can abstain from notifying the bankruptcy or composition court for a short period of time if it has sufficient reasons to believe that the company can restructure within a short period of time. However, mere hope or a vague expectation of a restructuring does not justify the postponement of the filing for bankruptcy. In addition, the board of directors can also file for composition proceedings (instead of bankruptcy).
Personal Liability of Directors
The duties of the persons entrusted with the administration, management and liquidation are not set out in detail in corporate liability law. The Swiss Code of Obligations speaks generally of damage which such persons cause "through an intentional or negligent breach of their duties" and refers to duties set out elsewhere in statute or in articles of association. Thus, a breach of a duty of care means the neglect of duties imposed on persons subject to corporate liability rules either by statute or by articles of association.
Swiss courts have developed on a case-by-case basis certain criteria which, if fulfilled, may result in personal liability of a director. Such precedents include among others:
- violation of dealing at arm’s length;
- violation of equitable risk allocation (building of cluster risks);
- dealings with persons close to the company which are disadvantageous;
- failure to provide for proper accounts including the annual report and its audit and keeping the books for at least ten years;
- failure to notify the court in the event of over-indebtedness without proper justification for the delay; and
- entering into new obligations while being aware of the company’s over-indebtedness.
To a large extent, the liability of a director depends on the specific factual circumstances and will therefore require a detailed analysis in a specific situation.
Proper delegation can considerably reduce the liability risk of members of the board of directors. A person who properly entrusts another body with the fulfilment of a task is liable for any damage caused by the latter unless he or she can show that in the choice, instruction and supervision of such body the diligence was exercised which circumstances required.