In the event of company bankruptcy, the personal liability of board members and other directors may be engaged. Swiss law — notably arts. 725 et seq. CO and 754 CO — imposes precise obligations on governing bodies and sanctions their violation through a damages action. PBM Avocats advises and defends directors, shareholders and creditors in these complex proceedings from Geneva and Lausanne.
Obligations of Corporate Bodies in the Event of Financial Difficulties (Art. 725 et seq. CO)
The revision of company law, which entered into force on 1 January 2023, restructured the obligations of corporate bodies in the face of the company's financial difficulties. The Code of Obligations now distinguishes three situations:
- Capital loss (art. 725 CO): when assets no longer cover half the share capital and legal reserves, the board of directors must take restructuring measures and convene a general meeting within six months;
- Threat of insolvency (art. 725a CO): when the company risks being unable to honour its commitments as they fall due, the board must take liquidity measures and may request a moratorium;
- Over-indebtedness (art. 725b CO): when the debts are covered neither at continuation value nor at liquidation value, immediate notification to the court is mandatory, unless creditors subordinate their claims or a serious restructuring is possible.
The Duty to Notify the Court and Its Consequences
The obligation to notify the court in the event of over-indebtedness (art. 725b para. 1 CO) is one of the most critical obligations for directors. Failure to comply with this duty — notably continuing to incur debts of the company while it is over-indebted — may engage the personal liability of directors for the damage caused to creditors by this delay.
Notification to the court triggers either the opening of bankruptcy or the granting of a composition moratorium if restructuring appears feasible. Failure to notify merely defers the inevitable while aggravating the damage to creditors and increasing the exposure of directors to liability actions.
The Liability Action Against Directors (Art. 754 CO)
Art. 754 CO provides for the personal and joint liability of board members, management and other persons dealing with the management of the company towards the company, shareholders and creditors for any damage resulting, intentionally or through negligence, from the breach of their duties. The conditions of the action are:
- A fault: breach of a legal duty (e.g. obligation to notify the court, proper maintenance of accounts, prohibition of preferring certain creditors during a suspect period) or a statutory duty;
- Damage: prejudice actually suffered by the company or directly by the creditors;
- A causal link between the fault and the damage.
In the event of bankruptcy, the action is generally brought by the bankruptcy administration on behalf of the estate. If it does not act, creditors may request the assignment of the estate's rights (art. 757 para. 2 CO) and bring the action in their own name.
Defence Strategies and Preventive Advice
Directors who anticipate financial difficulties must act quickly and in a documented manner. It is essential to: have interim balance sheets drawn up in good time; consult specialists (accountants, lawyers) at the first signs of difficulty; convene the competent bodies and take formal decisions; and meticulously document all measures taken.
Our lawyers advise directors on their legal obligations in times of crisis, represent them against liability actions and assist them in implementing restructuring plans or composition proceedings that make it possible to preserve both the company and their personal liability exposure.
Frequently Asked Questions on Director Liability in Bankruptcy
When must the board of directors notify the court in the event of over-indebtedness?
Under art. 725b para. 1 CO (in force since 1 January 2023, revision of corporate law), the board of directors must immediately notify the court as soon as an interim balance sheet shows that the company's debts are not covered either at continuation value or at liquidation value. This obligation is imperative. The board may defer this notification only if creditors agree to subordinate their claims or if a serious restructuring seems achievable within a reasonable period, and provided that the insolvency of the company is not to be feared.
What is the limitation period for a liability action against directors?
The liability action against directors (art. 754 CO) is subject to a three-year limitation period from the day on which the plaintiff became aware of the damage, the breach of duty and the identity of the responsible person (art. 760 para. 1 CO), and in any event ten years from the day on which the harmful act occurred. In the context of a bankruptcy, the period generally runs from the judgment opening the bankruptcy or from the discovery of the damage by the bankruptcy administration.
Who may bring a liability action against directors?
Under Swiss law, the liability action may be brought by several persons (art. 757 CO): the company (represented by the bankruptcy administration in the event of bankruptcy) for direct damage; shareholders for their indirect (reflective) damage after exhausting ordinary avenues; and corporate creditors for their direct damage (direct injury to their assets, distinct from damage caused to the company). The bankruptcy administration may assign the estate's rights to creditors if it decides not to act itself.
Can directors be personally ordered to cover the liabilities of the bankrupt company?
Yes, but only insofar as their fault caused proved damage to the company or the creditors. The liability action (art. 754 CO) is not an automatic action to pay the company's liabilities: the plaintiff must prove the fault (breach of a legal or statutory duty), the damage (effective loss suffered) and the causal link between the two. Directors are not jointly and automatically liable for all debts of the company; only their own personal fault engages their liability.
Did the 2023 revision of corporate law change the obligations of directors?
Yes. The CO revision that entered into force on 1 January 2023 profoundly modified the obligations of corporate bodies in the event of financial difficulties. The revised arts. 725, 725a and 725b CO now more clearly distinguish between situations of capital loss (art. 725 CO), over-indebtedness (art. 725b CO) and threat of insolvency (art. 725a CO). Differentiated restructuring measures are provided according to the degree of difficulty. The obligations of directors are clarified, particularly regarding the timing of court notification and the available alternatives.