Director liability of AG directors and GmbH managers is a particularly feared area of Swiss company law for business executives. Art. 754 CO establishes personal, direct and unlimited liability for damage caused by negligent management. PBM Avocats advises board members and managers on their legal obligations, assists them in restructuring proceedings and defends them in liability actions brought by companies, shareholders or creditors in Geneva and Lausanne.
The Legal Basis: Art. 754 CO
Art. 754 para. 1 CO provides that the members of the board of directors and all persons who deal with management or liquidation are liable towards the company, as well as towards each shareholder or corporate creditor, for the damage they cause them by intentionally or negligently breaching their duties. This provision is broad: it targets not only formally appointed directors, but also de facto directors — persons who actually exercise management without having the official title.
Fundamental Duties of Directors
Art. 717 CO imposes two cardinal obligations on directors:
- Duty of care: exercise their functions with the care that a reasonable person would exercise in an identical situation. This implies informing themselves, supervising, making informed decisions and reacting quickly to critical situations.
- Duty of loyalty: act in the interests of the company and not in their personal interest or that of third parties. The director must avoid conflicts of interest and disclose them to the board when they arise.
These duties are mandatory and cannot be reduced by the articles of association or an agreement. They constitute the standard of conduct expected of every Swiss company executive.
Non-Delegable Powers and Supervision
Art. 716a CO lists the powers that the board of directors cannot delegate, regardless of the internal organisation regulations. These non-delegable powers include notably the supreme management of the company, supervision of the persons entrusted with management, and above all the obligation to notify the court in case of over-indebtedness. A director who delegates a task remains nevertheless responsible for supervising its execution by the delegate (art. 754 para. 2 CO).
Liability in Case of Financial Crisis (Art. 725 CO)
Swiss legislation imposes specific obligations on the board of directors when the company's financial situation deteriorates. These obligations are graduated according to the gravity of the situation:
| Situation | Legal Obligation | Legal Basis |
|---|---|---|
| Loss of half of share capital and legal reserves | Convene the GM and propose restructuring measures | Art. 725 para. 1 CO |
| Over-indebtedness (debts > assets at continuation AND liquidation value) | Immediately notify the court | Art. 725b CO |
| Over-indebtedness with postponement of claims | Court notification may be deferred if creditors postpone their claims to the extent of the over-indebtedness | Art. 725b para. 4 CO |
| Imminent insolvency | Liquidity safeguarding measures; possibility of requesting a composition moratorium | Art. 725a CO |
Delay in notifying the court in case of over-indebtedness is the most common cause of liability action against directors in bankruptcy proceedings. The liability of executives in bankruptcy may be engaged for claims arising between the moment when over-indebtedness existed and the actual date of notification to the court.
Liability Actions: Who Can Act and How?
Under Swiss law, several categories of persons may bring a liability action against directors:
- The company itself (after a GM decision or in case of bankruptcy, by the bankruptcy administration)
- Shareholders (individual action for direct damage personally suffered)
- Creditors (direct action in case of insolvency of the company, art. 757 CO)
- The bankruptcy administration (after the opening of bankruptcy, on behalf of the estate)
The Business Judgment Rule Under Swiss Law
The Federal Supreme Court has progressively recognised in Swiss law a principle analogous to the American business judgment rule. According to this principle, courts accord a degree of deference to business decisions made by directors who acted in good faith, on the basis of reasonable information and in the interest of the company. This deference does not prevent the engagement of liability in case of manifest fault or conflict of interest, but it avoids judicial censure of business decisions ex post. Documentation of board decisions (detailed minutes, due diligence reports) is therefore crucial to secure this protection.
OASIA Liability of Directors
Beyond commercial law, directors may be pursued by OASI compensation offices on the basis of art. 52 OASIA for unpaid social contributions. This liability is personal, joint and several, and without a ceiling. It is often implemented in bankruptcies where the company failed to remit the deductions made from employee salaries. The limitation period is 3 years from the time the damage became known (art. 52 para. 3 OASIA).
Frequently Asked Questions on Director Liability in AG and GmbH
Can a director be held personally liable for the debts of an AG?
Yes, in the cases provided by law. Art. 754 CO provides that the members of the board of directors and all persons who deal with management or liquidation are liable towards the company, the shareholders and the creditors for the damage they cause them by intentionally or negligently breaching their duties. Liability is personal and unlimited. The main grounds invoked are: management contrary to the company's interests, delay in notifying the court in case of over-indebtedness (art. 725b CO), and non-payment of social contributions.
What is the obligation to notify the court in case of over-indebtedness?
Art. 725b CO requires the board of directors to immediately notify the court when the company's debts are no longer covered by its assets, both at continuation value and at liquidation value. This obligation is strict: a delay personally engages the liability of directors for the resulting damage to creditors. The court then declares bankruptcy, unless creditors agree to subordinate their claims (postponement) or a restructuring is possible.
How to defend against a liability action based on art. 754 CO?
The director in question can defend themselves by demonstrating: (1) that they did not commit a fault (compliance with the diligence of a conscientious director), (2) the absence of a causal link between their conduct and the alleged damage, or (3) the absence of damage. Delegation of powers to a third party does not exempt the director from their supervisory responsibility. However, if the criticised decision was based on reasonable information, the business judgment rule (developed by the Federal Supreme Court) may make it possible to set aside liability.
Are GmbH managers subject to the same rules as AG directors?
Largely yes. Art. 827 CO refers to the provisions on the liability of AG directors for GmbH managers. Managers therefore also answer for damages caused by negligent management (art. 754 CO) and are subject to the same obligations of diligence and loyalty. The main difference lies in the fact that GmbH managers often have more direct management powers than AG board members, which may influence the assessment of fault.
What are the limitation periods for a liability action against a director?
Since the revision of prescription law that entered into force on 1 January 2020, the relative limitation period is 3 years from the date on which the plaintiff became aware of the damage and of the responsible person (art. 760 para. 1 CO). The absolute limitation period is 10 years from the harmful act. In case of bankruptcy of the company, the bankruptcy administration may exercise the company's rights against former directors. Creditors may act directly on the basis of art. 757 CO.