Why over-indebtedness is not just an accounting problem
In Switzerland, GmbH and AG benefit from limited liability: in principle, members and shareholders risk only the capital they have contributed. However, this protection ceases when the company enters a state of over-indebtedness (excess of debts) and the management or administrative bodies fail to comply with the notification obligation under Art. 725b CO.
Over-indebtedness occurs when debts are no longer covered by assets valued at going-concern and liquidation values — not necessarily at the amounts recorded in the balance sheet. If there is no concrete prospect of eliminating the excess of debts and no appropriate measures are taken (restoration within the statutory deadlines or binding subordination of claims), managing directors and board members must without delay inform the court at the company's registered office.
Orderly, up-to-date, and well-documented accounting does not resolve a crisis on its own, but it is the essential tool for identifying the situation promptly, making informed decisions, and demonstrating that the diligence required by law has been exercised.
Legal framework: Arts. 725–725b CO
Since 1 January 2023, the reform of Swiss company law distinguishes three thresholds of financial distress. The notification obligation in cases of over-indebtedness is primarily governed by Art. 725b CO:
| Provision | Addressees | Essential content |
|---|---|---|
| Art. 725 CO | Management bodies (GmbH) / board of directors (AG) | Obligation to monitor solvency; if there is a risk of insolvency, take restructuring measures or file for a composition moratorium |
| Art. 725a CO | Same bodies | If assets no longer cover half of capital and protected legal reserves, adoption of restructuring measures (capital loss) |
| Art. 725b para. 1–3 CO | Same bodies | In case of justified concern of excess of debts: immediate preparation of interim accounts, limited audit, and mandatory notification to the court if debts are not covered |
| Art. 725b para. 4 CO | Same bodies | Exceptions to notification: binding subordination of creditors (principal and accrued interest) or well-founded prospects of eliminating the excess within no more than 90 days of presenting the audited interim accounts |
| Art. 717 CO / Art. 812 CO | Management bodies / board of directors | General duty of care and loyalty; accounting is the primary means of fulfilling financial and asset oversight |
Over-indebtedness must be distinguished from insolvency within the meaning of Art. 191 DEBA (inability to pay debts as they fall due). Both may coexist, but Art. 725b CO focuses on the assets-to-liabilities ratio and the prospect of full repayment, regardless of immediate liquidity.
When over-indebtedness exists
The balance-sheet test is not limited to comparing commercial balance sheet totals. Corporate bodies must assess whether, applying going-concern and liquidation values, assets cover debts:
Commercial balance sheet vs. insolvency interim accounts
A balance sheet prepared under Swiss accounting standards (Swiss GAAP/FER) may include assets recorded at values higher than those realizable in liquidation: unamortized fixed assets, doubtful receivables, obsolete inventory, overvalued participations.
For Art. 725b CO, interim accounts must be prepared by estimating assets at going-concern value and, if necessary, at liquidation value. Discounts on receivables, impairments, and conservative estimates on real estate and stock are essential. Accounting that ignores signs of deterioration delays crisis detection.
Prospect of full repayment
Even when debts exceed assets, the notification obligation does not arise if there is a concrete and documented prospect of restoration: shareholder contributions, cost reductions, asset disposals, debt restructuring, or binding new financing.
Prospects must be realistic, not generic. Under Art. 725b para. 4 lit. b CO, restoration must be achievable within an appropriate period, at the latest within 90 days of presenting the audited interim accounts, without further prejudicing creditors. Plans lacking financial backing or binding commitment do not exclude notification.
The role of accounting in prevention and compliance
The law does not require specific software, but it does require corporate bodies to know the company's financial position. In case of justified concern of excess of debts, Art. 725b para. 2 CO additionally requires a limited audit of the interim accounts by the audit firm or a licensed auditor.
| Accounting function | Contribution to Art. 725b CO |
|---|---|
| Timely recording | Prevents hidden liabilities or delays in accounts payable from distorting the assets-to-liabilities ratio |
| Depreciation and write-downs | Reflect deterioration in the realizable value of fixed assets, receivables, and inventory |
| Interim accounts | Enable detection of over-indebtedness before year-end closing, as required by Art. 725b para. 1 CO |
| Cash flow forecast | Complements balance-sheet analysis and supports solvency monitoring under Art. 725 CO |
| Decision documentation | Minutes, reports, and supporting calculations demonstrate the diligence of corporate bodies in case of dispute |
| Bank reconciliation | Ensures that cash and short-term liabilities reflect operational reality |
For SMEs that manage accounting in-house, tools such as Accountex make it possible to keep data up to date, generate interim balance sheets, and link general ledger, invoicing, and payment schedules — useful elements for identifying structural imbalances between income, expenses, and medium-term commitments at an early stage.
GmbH and AG: same obligations, different bodies
Arts. 725–725b CO apply in analogous fashion to the two most common corporate forms among Swiss SMEs. What changes is who bears the obligation, not the substance of the balance-sheet test:
GmbH (Sagl)
The obligation rests with the management bodies (managing director(s)). In small entrepreneurial teams, the managing director is often also the sole member: the line between business decision-making and legal compliance becomes blurred, but personal liability remains.
With waiver of ordinary audit (opt-out), there is often no external auditor to flag the situation: the quality of in-house accounting becomes even more decisive.
AG (SA)
The obligation lies with the board of directors as a whole. Every member must exercise oversight; operational delegation to an executive director does not release anyone from the duty to inform themselves and, if necessary, notify.
AGs subject to ordinary audit may rely on external opinion, but the board remains responsible for assessing the prospect of restoration and the decision to notify.
Warning signs to monitor in accounting
Certain recurring indicators precede formal over-indebtedness. Integrating them into periodic review reduces the risk of surprises at year-end closing:
- •Steadily eroding equity — accumulated losses absorbing equity and reserves with no visible operational recovery.
- •Non-subordinated debts to members — recorded as liabilities without a written commitment to insolvency subordination equivalent to equity.
- •Deteriorating trade receivables — growing aging beyond 90 days, defaults not covered by adequate provisions.
- •Financing current operations with short-term debt — repeated refinancing without improvement in operating margin.
- •Fixed assets recorded above market value — absence of impairment testing on participations, patents, or company real estate.
- •Discrepancy between accounting profit and cash flow — positive accrual profit but structurally negative cash position.
What to do when over-indebtedness emerges
A structured process protects the company and its corporate bodies. Haste does not justify omission, but neither does automatic notification without analysis:
Prepare interim accounts
Prepare interim accounts at going-concern value and, if necessary, at liquidation value: write down assets, provide for doubtful receivables, verify contingently relevant liabilities (litigation, guarantees, leasing).
Have accounts audited and assess restoration
Entrust the limited audit to the audit firm or a licensed auditor (Art. 725b para. 2 CO). Document binding contributions, agreements with creditors, sale of business units, or structural cost reductions. Involve legal counsel and, where appropriate, a trustee or auditor.
Explore subordination
Written agreements with creditors (in particular members and credit institutions) that subordinate their claims to the level of equity may exclude notification under Art. 725b para. 4 lit. a CO, if they cover the excess of debts and also subordinate interest accrued during the period of over-indebtedness.
Notification to the court
If realistic restoration and valid subordination are lacking, corporate bodies must without delay inform the court at the company's registered office. The court declares bankruptcy or proceeds under Art. 173a DEBA. Inaction exposes parties to civil liability for damage caused to creditors and, in serious cases, to criminal consequences for simple or fraudulent bankruptcy (Arts. 164 and 163 SCC).
Retain documentation
Minutes of the competent body, balance-sheet calculations, correspondence with advisers, and date of the decision: essential elements for demonstrating diligence under Art. 717 CO (AG) or Art. 812 CO (GmbH).
Consequences of non-compliance and best practices
Failure to comply with Art. 725b CO may result in joint and several liability of corporate bodies for the deterioration of the financial position after the point at which over-indebtedness was recognizable. Creditors and, in insolvency proceedings, the trustee may seek recovery of damages. Transparent accounting and timely, documented decisions constitute the most effective defense.
Periodic internal review. Even without an external auditor, schedule at least quarterly a simplified balance-sheet review: assets-to-liabilities statement, receivables aging, debt payment schedule, and comparison with budget.
Separate liquidity and equity. Having sufficient liquidity for 30–60 day maturities does not exclude over-indebtedness if overall assets do not cover medium-term debts.
Involve specialists early. Trustee, business lawyer, or restructuring adviser when warning signs intensify — not only after a creditor has already notified the court.
Leverage accounting digitalization. With integrated platforms such as Accountex, entrepreneurs and fiduciary firms can monitor balances, payment schedules, and margins in real time, generate balance-sheet reports, and reduce the risk of decisions based on outdated or incomplete data.
Operational summary
The notification obligation under Art. 725b CO protects the credit ecosystem and defines the liability of corporate bodies. For GmbH and AG, accounting is not a secondary compliance task: it is the radar that detects over-indebtedness, supports restoration assessments, and provides evidence of the diligence required by Swiss law.
| Key question | Guidance |
|---|---|
| When to notify? | When audited interim accounts show an excess of debts and neither valid subordination nor prospects of restoration within 90 days exist |
| Who notifies? | Managing directors (GmbH) or board of directors (AG), without delay |
| Role of accounting? | Timely detection, prudent valuations, interim accounts, limited audit, and documentation of decisions |
| Main risk of non-compliance? | Personal liability of corporate bodies for damage to creditors |