Capital loss at the end of 2022? The revised Swiss corporate law may force you to have a limited audit (even if you have otherwise waived an audit).

Alain Friedrich
Alain Friedrich

Start-ups often do not have an auditor in the first years of their business activity. This is permissible if the company does not have more than ten full-time employees on an annual average and all shareholders waive an audit (so-called opting-out).
However, the new Swiss corporate law obliges companies with an opting-out to have their last annual financial statement audited by a certified auditor if it shows a capital loss (Art. 725a CO).

Why should you care?

As part of the revision of Swiss corporate law, the restructuring law and in particular the provisions on capital loss were also adjusted. The adjusted provisions apply in full as of 01 January 2023, i.e., they also apply to the annual financial statements as of 31 December 2022.

Do your annual financial statements as of December 31, 2022, show a capital loss?

If your annual financial statements as of 31 December 2022 show a capital loss within the meaning of Art. 725a of the Swiss Code of Obligations (CO), the Board must not only take the necessary measures to eliminate the capital loss (e.g. raising new equity, adjusting the balance sheet by means of a capital reduction or conversion of debt into equity) but also appoint a licensed auditor to conduct a limited audit of the annual financial statements prior to approval by the general meeting.

This rule also applies if the company has opted out of an audit.

What is a capital loss according to Art. 725a CO?

A capital loss pursuant to Art. 725a CO exists if the last annual financial statements show that the company's assets less its liabilities no longer cover half of the sum of the share capital, the statutory capital reserve not repayable to the shareholders and the statutory retained earnings.

In short: a capital loss exists if the equity is less than 50% of the protected capital.

You can find an article on the calculation of protected equity here.

What are the obligations of the Board if it determines a capital loss at the end of 2022?

If the annual financial statements show a capital loss pursuant to Art. 725a CO, the Board must appoint a licensed auditor (Art. 725a para. 2 OR) and instruct him to conduct a limited audit.

This audit is special because the report is made to the Board and the purpose of the audit is to ensure that the economic situation of the company is not actually worse than presented by the Board.   

The licensed auditor must proceed with the necessary urgency.

There is no audit obligation if the Board applies for a debt restructuring moratorium.

What happens if the Board does not have the annual financial statements audited?

Pursuant to Art. 731 para. 3 CO, resolutions on the approval of the annual financial statements and on the appropriation of profits are null and void if they are passed without the required audit report being available to the general meeting. If at the end of 2022 there is a capital loss and the Board does not apply for a debt restructuring moratorium and does not audit the annual financial statement, the corresponding resolution is null and void.

In addition, liability under Swiss corporate law applies if the Board - despite the existence of a capital loss – does not have the annual financial statements subjected to a limited audit.

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