Swiss over-indebtedness and the board's duties (art. 725b CO)

What over-indebtedness means

Over-indebtedness is a balance-sheet state, and it is narrower and more serious than the financial troubles it is often confused with. A company is over-indebted when its liabilities are no longer covered by its assets, tested on two different value bases at once: going-concern values, which assume the business continues, and liquidation values, which assume it is broken up and sold. Both have to be measured, because a company can look solvent on one basis and not the other, and the law cares about both pictures.

This is distinct from the two lesser states on the ladder. A company can be short of cash but not over-indebted, a liquidity problem rather than a balance-sheet one. It can have suffered a capital loss, where it has eaten into the buffer of share capital and reserves, without yet being over-indebted. Over-indebtedness is the line past which the creditors as a body are no longer fully covered by the company's assets, and it is precisely because that line shifts the risk from the owners to the creditors that the law attaches its hardest duty to it. The owners' equity is gone; what is now at stake is other people's money.

The escalating ladder: art. 725, 725a, 725b

The 2023 company-law revision, in force since 1 January 2023, set out the board's distress duties as three graded steps, each with its own trigger and its own response. Reading them as a ladder is the clearest way to see where a given company stands and what its directors owe.

The duties are cumulative in spirit: a board that monitors liquidity properly under art. 725 rarely arrives at art. 725b by surprise. Art. 725 codified, in the 2023 reform, what good boards already did, the active monitoring of solvency and a duty to act when illiquidity threatens. Art. 725a deals with the capital-loss warning state, where the company has lost half its capital-and-reserves cushion and the board must take measures and, if the company has opted out of an audit, have the accounts reviewed. Art. 725b is the end of the ladder, and the rest of this guide is about it, because it is where directors' personal exposure is decided. Where the earlier rungs call for a rescue plan, that work is the subject of financial restructuring.

The board's duty on over-indebtedness

Art. 725b sets a sequence that begins the moment the board has reasonable concern that the company is over-indebted, not when over-indebtedness is proven. The trigger is suspicion on reasonable grounds, which is deliberately early, because the duty is preventive. From there the steps are fixed.

First, the board must immediately prepare interim financial statements, and it must prepare them on both bases, going-concern and liquidation values, rather than choosing the flattering one. Second, those interim accounts must be audited by a licensed auditor, even in a company that normally has no audit, because the figures that may send a company into bankruptcy cannot rest on the board's own say-so. Third, if both bases confirm over-indebtedness, the board must notify the court, the Überschuldungsanzeige, and the court will in principle open bankruptcy. The notice is a duty, not an option, and the directors who sign the accounts cannot treat it as a commercial choice to be weighed against the company's reputation. Where the figures are close or contested, getting the interim accounts and the audit right is itself the heart of the matter, and the work we do under our over-indebtedness mandate.

What lets the board hold off the court

The duty to notify is the default, but the law leaves two lawful ways to keep a viable company out of bankruptcy, and a board in distress lives or dies by them. Both have hard conditions, and neither is a way to simply carry on.

The first is a subordination of claims (Rangrücktritt). A creditor, very often a shareholder or a parent company, agrees that its claim ranks behind every other creditor and will not be paid until the company recovers. To lift the duty to notify, the subordinated amount must cover the over-indebtedness, and it must include the interest that accrues while the over-indebtedness lasts. On paper this restores cover and buys the company room to restructure. It is not, though, a write-off: the claim survives, merely ranked last, which matters to the subordinating creditor far more than it first appears.

The second is a realistic prospect of cure. The board may hold off notifying where there is a reasonable prospect that the over-indebtedness can be remedied within a reasonable period, and at the latest within ninety days of the audited interim accounts becoming available, provided creditors are not further endangered in the meantime. Ninety days is the outer limit, not an entitlement: the prospect has to be genuine, and the moment it stops being genuine the protection falls away. Where the rescue needs the protection of a court rather than mere goodwill, the right move is not to run the clock but to seek a composition moratorium, which stays enforcement while the restructuring is carried out.

What the duty does not do, and the liability it creates

The over-indebtedness regime is widely hoped to be softer than it is. Three corrections decide whether a board is protected or exposed.

It is not discretionary. Once the audited accounts confirm over-indebtedness and no exception applies, notifying the court is mandatory. A board cannot lawfully decide that filing is bad for business and keep trading. The duty exists exactly for the moment the company's interest and the creditors' interest diverge, and at that moment the law makes the creditors' protection prevail.

Delay creates personal liability. Trading on while over-indebted and deepening the deficit, the conduct Swiss practice calls Konkursverschleppung, is among the most frequent grounds of director liability. Under art. 754 of the Code of Obligations the directors answer personally for the loss their breach causes, and the measure is typically the increase in the company's indebtedness across the period of culpable delay. This is not a theoretical risk; it is the claim the bankruptcy estate reaches for first.

It does not move to the auditor or anyone else. The auditor reviews the figures; the board owns the decision. Bringing in advisers, ordering the interim accounts or arranging a subordination does not transfer the directors' responsibility, it discharges it, but only if done in time and properly. The liability sits with the governing body throughout, which is why the value of acting early is measured in the personal exposure it removes, not only in the company it may save. A company wound up correctly while still solvent never reaches this point at all, the subject of our guide to solvent liquidation versus bankruptcy.

How the board duty is run in practice

The decisive period is short and the stakes are personal, so the work is about clarity and speed. We act for boards from the moment over-indebtedness is a reasonable concern: preparing the interim accounts on both value bases, arranging the licensed audit, and giving the board the honest answer to the only question that counts, whether it must notify the court or has a lawful route to hold off. Where subordination or a realistic restructuring closes the gap, we execute it inside the statutory window; where the rescue needs protection, we move the company into a moratorium; where neither is real, we manage the court notice properly rather than letting delay compound the loss. That is the substance of our over-indebtedness service.

The point we press with every board is that the duty protects the directors as much as the creditors. Acting at the first reasonable concern, on audited figures, is what converts an existential threat into a managed process and keeps a director's own assets out of the claim. The rest of our litigation, debt and insolvency guides set out the enforcement, moratorium and liquidation routes the decision leads into.