Loss of capital and over-indebtedness under Art. 725 CO
As at: · fastview ag, Suhr
Professionally responsible: Marco Zanetti and Reto Ackermann, fiduciaries and auditors, fastview ag
Company law obliges the board of directors to monitor solvency and the coverage of capital. This page explains the four situations concisely and shows how nunia’s capital analysis checks them from the imported figures.
The situations
| Situation | Basis | What it is about |
|---|---|---|
| Imminent insolvency | Art. 725 CO | The board of directors monitors solvency and takes measures in the event of imminent insolvency. |
| Loss of capital | Art. 725a CO | The assets less liabilities no longer cover half of the share capital and statutory reserves. |
| Over-indebtedness | Art. 725b CO | The creditors’ claims are covered neither at going concern values nor at liquidation values. |
| Return of contributions | Art. 680 para. 2 CO | Shareholders may not reclaim their contribution, not even covertly through a claim against the company. |
In the event of a loss of capital, the board of directors takes measures to remedy it; if the company has no auditor, it has the last financial statements subjected to a limited statutory examination by a licensed auditor before approval. If there is reasonable concern of over-indebtedness, the board of directors prepares interim financial statements at going concern and at liquidation values and has them examined. If the company is over-indebted, it notifies the court unless an exception applies, such as a sufficient subordination.
How the capital analysis calculates
In nunia the capital analysis is located under “Closing”. The reference figures come from the import: share capital, statutory capital reserve and retained earnings, equity, current assets and short-term liabilities. Each reference figure can be adjusted; “Refill from import” retrieves the values from the trial balance again. From these, nunia calculates:
- Protected capital: nominal capital plus the statutory reserves up to a maximum of 50 % of the nominal capital (20 % for holding companies), plus revaluation reserve and reserve for own shares.
- Loss of capital, if equity is below half of the protected capital.
- Over-indebtedness, if equity is negative. You record subordinations separately; they can make notifying the court unnecessary, but do not eliminate the over-indebtedness.
- Imminent insolvency as a signal if current assets do not cover short-term liabilities.
- Free equity taking into account hidden reserves after taxes, as well as the distributable equity.
What the balance sheet does not show
Under “Additional information” you record whether the company is a holding company, hidden reserves and the profit tax rate, a claim against the shareholder as well as subordinated loans with subordination. If the claim against the shareholder exceeds the available equity, nunia reports a finding on the return of contributions.
Finding, measures and letter
Each finding names the article and the necessary measures, such as informing the client and having this confirmed in writing or, in the case of over-indebtedness, preparing interim financial statements at going concern and liquidation values. With “Letter” nunia creates a Word document to the governing body – without a finding, with the sentence that no breaches of the law regarding CO 725 and CO 680 were identified. In the financial statements nunia proposes the disclosure on loss of capital or over-indebtedness in the notes if such a finding exists.
The capital analysis applies to AG, GmbH and cooperative; the terms adapt to the legal form, such as nominal capital of a GmbH or cooperative share capital.
What nunia takes care of
- Take over reference figures from the import
- Calculate protected capital, threshold for loss of capital and distributable equity
- Check four situations and name findings with article and measures
- Take subordinations and shareholder claims into account
- Generate a letter to the governing body as Word
- Propose the disclosure in the notes to the financial statements
What you decide
- whether and which restructuring measures are necessary
- valuation at going concern and liquidation values in the interim financial statements
- effectiveness of a subordination
- notification of the court by the governing body
This page summarises the legal situation in simplified form and does not replace advice in the individual case. The law, the articles of association and current practice are authoritative.
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Frequently asked questions
When is there a loss of capital?
When the assets less liabilities no longer cover half of the share capital and statutory reserves (Art. 725a CO). For this, nunia calculates the protected capital and compares equity with half of it.
When is a company over-indebted?
When the creditors’ claims are covered neither at going concern nor at liquidation values (Art. 725b CO). In the capital analysis, negative equity indicates the finding; the interim financial statements remain the task of the governing body.
Does a subordination eliminate the over-indebtedness?
No. A sufficient subordination can make notifying the court unnecessary, but the over-indebtedness remains. nunia therefore records subordinations separately.
Where do the figures of the capital analysis come from?
From the import of the trial balance. Each reference figure can be adjusted; “Refill from import” retrieves the values from the import again.
Does the capital analysis also apply to the GmbH?
Yes. It applies to AG, GmbH and cooperative; the terms adapt to the legal form.
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