The Good Board
Agenda · The board in distress

Capital loss or over-indebtedness proximate

The zone where delay becomes a criminal offence.

Status
First edition · 2026-05-05
Category
In distress
Last reviewed
2026-05-05

Note

References are to Art. 725a, 725b OR as in force under the 2023 reform.

If the clock is running now, call directly.

A Q3 forecast shows an EBITDA shortfall that, if realised, would bring the half-year balance sheet close to the capital- loss test. An audit review identifies a prior-period restatement that would breach the over-indebtedness threshold. A single customer bankruptcy receivable, with no collateral, would eliminate remaining free equity. The Swiss stock-corporation law treats this zone — the approach to Art. 725a and Art. 725b OR — with unusual procedural precision. Inside it, ordinary board latitude contracts sharply; outside it, the same decisions would be unremarkable. The single most common failure mode is a board that recognises the zone too late, acts on instinct rather than statute, and finds that its distributions, transactions, or delays in that window produced personal liability that its ordinary decisions, weeks earlier, would not have.

1. The duties that bear on this

The graduated procedural architecture of Art. 725 ff. OR. The 2023 corporate-law reform restructured the capital-crisis provisions into three escalating duties: concern about solvency (Art. 725), half-capital loss (Art. 725a), and over-indebtedness (Art. 725b). Each imposes specific procedural obligations on the board and narrows the range of decisions the board may take without court involvement.

Criminal exposure for delay. Art. 165 StGB and Art. 725b OR together engage criminal exposure for directors who delay notification to the court once over-indebtedness is established and cannot be reversed by creditor-rank subordination. This is one of the few Swiss provisions where the delay itself is the offence.

Every transaction in the zone is a potential liability event. Distributions are the paradigm but not the limit. Group-internal lending that weakens the distressed entity, payments to preferred creditors that disadvantage others, asset sales at below-market value, bonus payments, severance settlements — each, in the over- indebtedness zone, is an exposure under Art. 754 OR and potentially under the insolvency offences of Art. 163 ff. StGB.

2. The process

  1. Commission an interim balance sheet prepared on going-concern and on liquidation bases. Do this at the moment the zone becomes plausible, not at the moment it becomes confirmed.
  2. Engage the external auditor on the interim balance sheet. Art. 725b requires auditor review where over-indebtedness is established; begin the audit conversation early rather than at the last moment.
  3. Assess credible remediation: fresh capital (rights issue, shareholder loan, conversion of debt to equity); subordination of creditor claims (which can defer but not prevent the Art. 725b notification duty); disposal of non-core assets; operational restructuring.
  4. If remediation is realistic within the Art. 725b time frame, document a written remediation plan with measurable milestones, adopted by a formal board resolution, with auditor support.
  5. Freeze all non-operational transactions. No dividends, no extraordinary bonuses, no related-party transfers, no intra-group financial restructurings other than as part of the remediation plan, until the zone is exited.
  6. If over-indebtedness is established and remediation is not realistic, notify the court under Art. 725b para. 3 without further delay. The alternative — a court-ordered bankruptcy a month later — produces personal criminal exposure under Art. 165 StGB that the voluntary notification does not.
  7. Engage restructuring counsel. Internal legal and finance functions are rarely equipped for the procedural precision this zone requires.

3. Questions to ask management and the auditor

4. The record to leave

The interim balance sheet; the auditor’s engagement and review; the remediation plan with its assumptions and milestones; board resolutions on each material decision taken in the zone; documented freezes on non-operational transactions; and, if notification becomes necessary, the formal court notification and its supporting exhibits. A board that cannot produce these records after the fact is a board whose directors will be held personally liable on the presumption that no considered decision was taken.

5. Failure modes

Papierschlamm — 4A_62/2024. The paradigm Swiss illustration. A known contingent environmental liability, a distribution up to the parent despite inadequate reserves, subsequent insolvency, and personal Art. 754 liability for both the formal vice-chair and the accounting-firm partner acting as faktisches Organ. The lesson is that distributions in the shadow of a foreseeable over-indebtedness are not shielded by formal compliance with the capital-maintenance rules.

The three-month illusion. A board that believes it has three months to remediate before notifying the court, and uses the time to negotiate subordinations, is sometimes right — and sometimes catastrophically wrong. The procedural discipline is auditor-engaged, not instinct-based.

Preferred-creditor payments. In the zone, paying one creditor who is pressing — a key supplier, a lender with an immediate deadline, an intra-group counterparty — while others wait is, under the insolvency-offences framework of Art. 163 ff. StGB, a criminal exposure. The instinct to keep operations running by selective payment is understandable; the legal consequence is not forgiving.

Cognitive register. Distress-zone decisions are particularly exposed to denial: the interim balance sheet is commissioned late, the auditor conversation is deferred, the freeze on non-operational transactions is soft — each of these actions would require the board to acknowledge where the company actually is. The hot-hand fallacy sustains denial — directors persuade themselves that the next quarter will recover the position, which makes the court-notification trigger feel unnecessary — and sunk-cost reasoning anchors continued investment in a course that the objective facts now warrant abandoning. The Papierschlamm and related Swiss patterns are consistent with what the cognitive research would predict: procedural compliance with Art. 725a/725b requires directors to act against the cognitive pull of denial, which means the procedure must be invoked automatically on triggers rather than invoked when it feels right.

6. See also