Loss of capital and insolvency

This situation is referenced in article 725a paragraph 1 of the Swiss Code of Obligations

 

A loss of capital occurs when it is discovered in the most recent annual balance sheet that half of the capital and mandatory reserves are not covered. In this case the Board of Administrators must immediately summon a general shareholder's meeting and propose consolidation measures (for example an increase in capital, the reassessment of property or of directly held investments).

 

 

 

 

Capital : 500,000 CHF

 

General reserves (according to the law) : 300,000 CHF

 

Reserves for own shares: 100,000 CHF

 

Revaluation reserve: 50,000 CHF

 

Financial year loss: 551,000 CHF

 

The capital base consequently amounted to 399,000 CHF.

 

The amount of capital, 399,000 CHF, is less than half of the total capital and mandatory reserves (500,000 + 300,000 + 100,000 + 50,000) /2 = 475,000 CHF. The Board of Directors must arrive at the conclusion that half the capital and mandatory reserves is not covered and must immediately summon a general shareholder's meeting to propose consolidation measures (an increase in capital for example).

 

 

 

Capital : 500,000 CHF

 

General reserves (according to the law) : 100,000 CHF

 

Reserves for own shares: 100,000 CHF

 

 

Financial year loss: 551,000 CHF

 

The amount of capital, 399,000 CHF, is great than half the capital and mandatory reserves (500,000 + 100 + 100) / 2 = 350,000 CHF. Half the capital and mandatory reserves is covered and no action needs to be taken.

 

 

 

Capital : 500,000 CHF

 

General reserves (according to the law): 250,000 CHF

 

Reserves for own shares: 100,000 CHF

 

Revaluation reserve: 100,000 CHF

 

Financial year loss: 551,000 CHF

 

The capital is once again 399,000 CHF and is less than the total capital and mandatory reserves (500,000 + 250,000 + 100,000 + 100,000) / 2 = 475,000 CHF. The Board of Directors should come to the conclusion that half of the capital plus mandatory reserves is not covered and immediately summon a general shareholders meeting to propose consolidation measures: like the reassessment of property or investment holdings by the company (like those offered under article 670 CO of the Swiss Code of Obligations) might be a possible measure to operate under the surveillance of an accredited auditor.

 

 

 

In this situation and when the board of directors (or management) feels that it is a serious debt, two assessments should be immediately prepared and submitted to an accredited auditor for verification.

 

 

If in these two assessments the debts are greater than the assets, the judge deciding whether or not the company is bankrupt must be notified.

 

 

Balance sheet as of 12/31/2011

 

 

Current assets : 600,000 CHF

 

Fixed (or capital) assets : 1,900,000 CHF

 

 

Debt capital (debts) : 2,550,000 CHF

 

Equity :

 

Capital stock : 500,000 CHF

 

Reserved share : 100,000 CHF

 

Other reserves : 200,000 CHF

 

Accumulated deficits : -550,000 CHF

 

Deficits from this financial year: -300,000 CHF

 

It appears on the balance sheets as of 12/31/2011 that the company is clearly insolvent because the debts (2,550,000 CHF) are greater than the assets (2,500,000 CHF). As a result the management of the company must immediately draw up two balance sheets: one of the net value of assets and one of the liquidation value of assets. If these two assessments show that the debts are greater than the capital, the presiding judge must seize the assets of the company and declare it bankrupt.

 

In the situation described above, it must be noted that from 2010, the company was losing capital because the equity at that time ((500,000 + 100,000 + 200,000 – 550,000) = 250,000 CHF) were less than half the capital plus the mandatory reserves ((500,000 + 100,000)/2 = 300,000 CHF). We note that the free reserve of 200,000 CHF does not have to be taken into account in this calculation. As a result, from the end of the previous financial year, the management should have already summoned a General shareholders meeting to propose consolidation measures without having to notify the judge.