Indication of over-indebtedness in corporations

The notice of over-indebtedness becomes necessary when, in a corporation, the external capital is no longer fully covered by the assets (Art. 725 Code of Obligations).

When should a notice of over-indebtedness be made?

Over-indebtedness is a particular reason for bankruptcy in a corporation (e.g., GmbH, AG). If the last annual balance sheet shows that half of the share capital and the legal reserves are no longer covered, the board of directors must immediately convene the general meeting and request restructuring measures. If there is justified concern about over-indebtedness, an interim balance sheet must be prepared and submitted to a licensed auditor for review. If the auditor finds that the claims of the company’s creditors are not covered either at going concern values or liquidation values, the board of directors is obligated to immediately notify the judge, unless creditors, with claims to the extent of the shortfall, subordinate themselves behind all other company creditors. The notice of over-indebtedness may only be omitted if there is a good prospect of restructuring.

If no notice of over-indebtedness is made, yet over-indebtedness exists, there may be a case of bankruptcy delay. A bankruptcy delay occurs when over-indebtedness exists, no notice of over-indebtedness is made, but business activities continue, and damage to creditors or shareholders occurs.

The causes of duty violation can have various reasons. It is conceivable that the management fails to keep the books, or does so inadequately, that reckless actions are taken, or that the supreme body continues the business, despite the existence of over-indebtedness, in the hope of improvement. The responsible persons can be held accountable both civilly and criminally for bankruptcy delay.