Driven by the ideal of creditor protection, Switzerland introduced a solvency test for all companies in early 2023, in addition to the existing equity capital requirements. This establishes now a dual layer of creditor protection in Switzerland, a framework that is typically reserved internationally for banks and insurance companies. Legal commentators have praised this development, highlighting that the law now provides a dynamic (liquidity-based) and a static (equity-based) early warning indicator for companies in crisis.
Under the revised Article 725 of the Swiss Code of Obligations, the board of directors is explicitly required to continuously monitor the company's solvency. During times of financial distress, decision-making authority shifts to the board, which is mandated to act "with the required urgency" to avert insolvency. If a company becomes insolvent for avoidable reasons, board members may face personal liability.
Insolvency is defined as the company being unable to meet its financial obligations due to a lack of both funds and credit, not just temporarily, but on an ongoing basis. Initially, the Swiss Federal Council proposed a forecasting period of six months (or 12 months for larger companies) aligned with accounting standards for assessing the going concern status of a company (Article 958a of the Code of Obligations). However, these timeframes were removed during parliamentary debates, leading to a simpler, principles-based legal framework intended to account for the unique circumstances of individual cases.
Despite this flexibility in the law, legal scholars predominantly recommend a uniform forecasting period of 12 months, contradicting the legislator's intent. We respectfully disagree: For most businesses, a six-month liquidity horizon should be appropriate as longer time horizons can rarely be assessed on a reliable basis. For start-ups with higher risk profiles a shorter period of three months seems appropriate.
The liquidity plan should also reflect future inflows and outflows, potential proceeds from asset sales, or debt deferrals if they can reasonably be expected to materialize. Some legal scholars require "preponderant likelihood," meaning a probability of over 50%. However, this strict interpretation could threaten Switzerland's status as an innovation hub, as innovative or high-risk ventures often have uncertain prospects and rarely achieve overwhelming probabilities of success. Such an approach could thus result in over-financing requirements for riskier business activities. Furthermore, as with any business decision, the degree of likelihood cannot be quantified in precise percentages.
Conclusion
Boards of directors must continuously monitor liquidity. In times of crisis, both liquidity and equity require heightened attention.
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