Legal Aspects of Coronavirus in Switzerland V – The Role of the Board of Directors in Times of a Crisis

Under Swiss corporate law the Board of Directors is empowered to delegate the operational management of the “Daily Business” to a large extent to the Executive Board. In times of a crisis, however, the Board of Directors, as the “supreme crisis and risk manager” of any company, is obliged to become increasingly active itself and to take the appropriate measures within the scope of its authority to ensure the company’s existence. The purpose of this article is to briefly highlight various aspects that the Board of Directors must consider in crisis situations.

• Review of Corporate Governance

In times of a crisis, smooth cooperation between the Board of Directors and the Executive Board is essential. This requires inter alia clear regulations on the competences and responsibilities of the different executive bodies. Particularly among SMEs, there is still a widespread misconception that so-called corporate governance is exclusively an instrument of large, listed companies. Often, SMEs simply do not see the need to create clear rules on the allocation and delimitation of tasks and competences of the executive bodies. Even if the articles of association of many SMEs regularly refer to corresponding organizational regulations, these do not exist de facto or only in insufficient form. This can lead to unnecessary and time- and energy-consuming power struggles between the company’s management bodies. It is therefore important to review and, where necessary, adjust internal organizational structures and competences in order to cope with crisis situations.

• Monitoring of the financial situation and avoiding information deficits

Significant drops in earnings and the resulting liquidity squeeze can quickly threaten the existence of a company. In order for the Board of Directors to be able to perform its duties in a timely manner and, if necessary, initiate appropriate restructuring measures, it must be ensured that the Board of Directors is informed promptly and comprehensively about the ongoing development of the financial situation. The ultimate lead of the company, organisation of the accounting, financial control and financial planning, insofar as these are necessary for the management of the company, and notification of the judge in the event of over-indebtedness are non-transferable tasks of the Board of Directors, which the Board of Directors can not delegate, nor can it exculpate itself from possible liability claims by pointing out that it didn’t know. In order to carry out its tasks with due care, the board of directors must, if necessary, acquire the necessary information itself and, if necessary, take an active role in the executive management of the company at least temporarily.

In addition to the financial situation of the company, the Board of Directors should also closely monitor the market environment in order to review and adjust the company’s current strategy and furthermore keep an eye on the current development of the legal situation. Against the background of COVID-19, various decrees have recently been issued at ordinance level, which also directly affect companies in various respects. One example is the current ban on public assemblies, which prohibits among others the holding of general meetings with the physical presence of shareholders. Shareholder rights must instead be exercised by a proxy or by written or electronic means for the time being.

Further legislative changes that will affect companies in various ways are also expected in the coming weeks. For example, the Federal Department of Justice (EJPD) is currently examining, on behalf of the Federal Council, temporary regulations regarding the deferral of bankruptcy, which would mean that companies could wait to file for bankruptcy, if there is a threat of “corona-related over-indebtedness” and if there is a prospect that over-indebtedness can be remedied after the crisis.

In order to identify these economic and legal changes at an early stage and to implement the necessary measures as quickly as possible, it may be necessary to hold Board meetings at shorter intervals as usual.

• Financial management in crisis situations and liability risks of the Board of Directors

In our last article (Legal Aspects of Coronavirus in Switzerland IV – The Walk into Uncertainty), we already described various possible measures that a company can currently take to maintain liquidity. These include the introduction of short-time work (Kurzarbeit), investment stops, the realization of assets not required for operations or the application for a bridging loan. Another very important aspect is proactive communication with employees and contractual partners and their early involvement in any restructuring process.

In accordance with Art. 717 of the Swiss Code of Obligations (OR), the Board of Directors is primarily obliged to exercise due care and loyalty towards the company and its shareholders. If a company gets into financial difficulties, this interest situation shifts as the board of directors increasingly has to take into account the interests of creditors. The use of the available financial resources must therefore be planned precisely and it needs to be ensured that all creditors are treated equally.

In addition, there are liability risks, which the Board of Directors should increasingly keep in mind in its activities. Based on various legal regulations, the Board of Directors can be held personally liable. Against this background, the Board of Directors should ensure that employees’ social security contributions, taxes and fees are paid even in times of a crisis.

The duties of the board of directors in connection with a (threatened) loss of capital and over-indebtedness must also be observed. If the Board of Directors fails to act in good time in this regard, it may be accused of procrastination, with the corresponding liability consequences. It is also important that the board of directors carefully records its activities in order to be able to prove in any liability proceedings that the problems have been identified and discussed and that the decisions made have been reached in a formally correct decision-making process. This is another aspect that is often neglected and can have fatal consequences, at the latest when liability issues arise.

• Conclusion

The current crisis and the associated economic effects are confronting the Board of Directors of various companies with major challenges. The Board will be forced to make a number of important, non-delegable decisions within a very short period of time. In order to guide the company safely through these difficult times, and also to minimise potential liability risks, it is important to consult appropriate experts and optimise internal management processes.