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20 January 2025 Board Responsibilities in case of Over-Indebtedness

In addition to the solvency (see our previous blog), the board must under Swiss law monitor the balance sheet: In case over-indebtedness, the board must balance continuing operations with protecting creditor interests. If restructuring seems more likely to succeed than fail, the board should pursue it to fulfill its duty of care and loyalty. At the same time the board must closely monitor that all claims with potential personal liability (e.g. social security contributions, employee pension contributions, often also withholding tax) are fully settled.

The board must determine the extent of over-indebtedness through interim financial statements (not just a simple balance sheet). These statements must first assume the company will continue operating. If this assumption is valid and there is no over-indebtedness based on these values, liquidation values do not need to be calculated.

If continuing operations are no longer feasible, the interim financial statements must use liquidation values instead. These statements can be simplified as long as they still present the key facts clearly. The interim financial statements must be reviewed by an auditor.

Switch to Liquidation Values

How long can operating values be used if the company’s ability to continue is in doubt? If insolvency is unavoidable, the company cannot assume it will continue operating and must switch to liquidation values. When this happens, the company’s assets often shrink dramatically while liabilities grow, leading to over-indebtedness. According to Article 958a of the OR, liquidation values must be used if it is "likely unavoidable" that the company will cease operations within 12 months of the balance sheet date. This rule is based on IAS 1.25: financial statements should assume a company will continue unless management plans or is forced to liquidate.

It’s important to distinguish between two situations:

  1. Threatened Continuation: This occurs when liquidity and equity are not secured until the next general meeting. In this case, the auditor may note significant uncertainties about the company’s ability to continue. Many startups and innovative companies operate under such warning because they take entrepreneurial risks.
  2. Unavoidable Liquidation: This happens when there is no realistic alternative to shutting down.

Auditors must assess whether management’s assumption of continuation is reasonable. This involves checking if planned measures are likely to improve the situation, future assumptions are based on reliable data, and any funding promises are confirmed.

It is incorrect and against Article 958a OR to conclude that threatened continuation (or a missing going concern) automatically means that liquidation is unavoidable. If successful restructuring is realistic option, then the board must in our view prepare financial statements using operating values, even if liquidity for the next 12 months is uncertain. We observe that some legal authors take a stricter view. There is, however, general consensus that values must be used if it is clear that liquidity, even with planned restructuring, will not be sufficient for continued operations. Plans for restructuring must be credible and well-documented and have a reasonable implementation chance. Only such an interpretation aligns with the legal requirement that liquidation must be “unavoidable” before switching to liquidation values.

Author: Matthias Staehelin

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