Sub-balance, capital loss and over-indebtedness

When a stock corporation faces financial difficulties, it may be legally obligated to take measures to rectify the situation. Depending on how critical the situation is, underbalance, partial capital loss, and over-indebtedness are distinguished.

In Art. 725 CO, the legislature has stipulated what joint-stock companies must do when there is a risk of bankruptcy. If there are no longer sufficient financial resources available to satisfy open creditor claims, the companies must initiate restructuring measures. Depending on the size of the loss, three different stages are distinguished.

Underbalance (without legal consequences)

An underbalance without legal consequences exists when a company makes a loss, but the assets are still greater than the external capital plus half of the share capital and the statutory reserves. Although this situation is not ideal and management should try to write black figures again in the next fiscal year, there is no legal obligation to act yet.

Example calculation:

A. AG owns a bank account with 100,000 CHF and machinery valued at 55,000 CHF. In total, it has assets amounting to 155,000 CHF. Outstanding claims from suppliers total 60,000 CHF, the share capital is 100,000 and the statutory reserves 15,000 CHF. In addition, a loss of 20,000 was recorded in the balance sheet. In this case, there is an underbalance without legal consequences. A. AG did make a loss, but the assets (155,000 CHF) are still greater than the external capital (60,000 CHF) plus half of the share capital and the statutory reserves (50,000 + 7,500 = 57,500 CHF).

Capital Loss

An underbalance with legal consequences or a capital loss occurs when the assets can still fully meet the open claims (external capital), but are no longer sufficient to cover half of the share capital and the statutory reserves. In this situation, the board of directors must immediately convene the general meeting and request restructuring measures (Art. 725 Para. 1 CO).

Example calculation:

Suppose A. AG has taken out a loan and as a result, the amount of external capital has risen to 100,000 CHF. Because nothing has changed with the assets, the accounting loss now amounts to 60,000 CHF. Now the assets are still sufficient to settle the open external capital claims (155,000 CHF > 100,000 CHF), but the remaining amount (55,000 CHF) is smaller than half of the share capital and the statutory reserves (57,000 CHF compare above).

Over-indebtedness

Over-indebtedness exists when the assets are no longer sufficient to cover the external capital. When this is the case, an interim balance sheet must be prepared and audited by a licensed auditor. If he confirms that the open claims cannot be covered either at going concern or liquidation values, the board of directors must notify the judge of the over-indebtedness (Art. 725 Para. 2 CO).

Example calculation:

The external capital of A. AG is now 160,000 CHF and thus the accounting loss has increased to 120,000 CHF. At this point, the assets are less than the external capital (155,000 CHF < 160,000 CHF). Over-indebtedness exists.

The regulation of Art. 725 Para. 2 CO also applies if there is not yet any over-indebtedness, but it is imminent. Thus, there is a "justifiable suspicion of over-indebtedness". This is for example the case, when the assets are only very slightly greater than the external capital. Even if a corporation has no liquid assets (cash, bank account, etc.), a "justifiable suspicion of over-indebtedness" is often assumed, since most companies need liquid funds to operate their businesses and actually settle open creditor claims in a timely manner.

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