Over a month of corona crisis - time for a stopover and an assessment. As a board mem-ber, do you have undertaken the necessary precautions? The following article describes the seven most important legal recommendations for the Board of Directors (hereinafter «BoD»):
1. Compliance with the company’s organisational structure
2. Compliance with newly adopted Coronavirus regulations
3. Health, safety and appreciation of employees
4. Top priority: Monitoring and securing of the company’s liquidity
5. Adaptation of reporting and risk management to extraordinary situation
6. Financial emergency planning and minimizing of personal liability
7. Financial statements 2019 and the General Meeting
I. Compliance with the company’s organisational structure
Even in crisis, the established structure of the company’s organisation (in accordance with the law, the articles of association, the organisational regulations and any other documents concerning the company’s organisation) continues to apply. In general, the organisational regulations may delegate the management of the company from the BoD to the Management Board. Such delegation should be adhered to. The Management Board is responsible for the operational business and for taking measures regarding the Coronavirus crisis. The BoD is responsible for the overall supervision and strategic issues. If the BoD suddenly interferes in the operational business without any specific reason, the division of responsibilities of these two company bodies becomes disarranged and thereby the BoD potentially extends its scope of personal liability.
II. Compliance with newly adopted Coronavirus regulations
Due to its duty to supervise the management of the company, the BoD must ascertain from the Management Board (and keep records) that the new regulations for combating the coronavirus (so-called COVID-regulations) are complied with (cf. also Current Pandemic and Official Orders).
III. Health, safety and appreciation of employees
As part of its overall supervision, the BoD should check (and keep records) that the Management Board ensures the safety and health of the company’s employees (as far as possible by home office or quarantine directives, adherence to social distancing, protection of risk patients and monitoring of respective employer instructions).
By showing its appreciation to the employees, the BoD should strengthen the morale in these difficult times. The management is challenged, if not overwhelmed. Convey calmness and trust.
IV. Top priority: Monitoring and securing of the company’s liquidity
As the most important and urgent task, the BoD is obliged to keep an eye on the liquidity of the company in the current situation and request appropriate measures from the Management Board. The principle of hope is not enough. The Management Board should examine the following points and report to the BoD accordingly:
- Monitoring of liquidity (recommendation: weekly)
- On-going liquidity planning (recommendation: weekly)
The BoD must assess the risk evaluation and implementation of all measures undertaken by the Management Board. In particular, the following measures may be considered:
- Stopping/delaying of payments until liquidity plan is available
- Revenue plan (bad/worst-case scenario)
- Immediate stop and strict review of all intended expenditures, orders and hires until new revenue and liquidity plan is available; stopping/delaying of orders
- Adjustment of payment approval process: Which payments are indispensable? Pay attention to risks of creditor preference in case of danger of over-indebtedness ac-cording to Art. 725 para. 2 CO or in case of danger of insolvency due to illiquidity
- Assurance of financing (equity and debt financing, bank loans, bridge loans, COVID-19-loans)
- Short-time work and application for short-time work compensation
- Further cost reduction measures (reduction of overtime, vacation instructions)
- Agreements with suppliers (including lessors) and customers, precautionary contract terminations
- Wage adjustments, reduction of work quota, redundancies
- Postponement of capital redemption and dividend distribution
- Measures to increase inflow of liquidity (debtor management: collection of due balances, cash discount for undue balances, advance payments, bridge loan)
- Renegotiation of contracts
V. Adaptation of reporting and risk management to extraordinary situation
Within the supervision duty, the BoD should request the adaption of the timing and content of the periodic reporting by the Management Board. The extraordinary situation requires strict risk management.
Timewise, a weekly reporting by the CEO to the BoD turned out to be an efficient solution (especially with regard to liquidity and liquidity planning).
In terms of the content of the reporting, the BoD should direct the Management Board to conduct risk assessments and present scenarios. In order to enable the BoD in a timely manner to obtain comprehensive knowledge about the risk management conducted by the Management Board, the following points are relevant:
- Scenarios and planning: Planning for maintaining or reducing business in various scenarios
- Bad-case scenario (e.g. drop in revenues of 30% for FY 2020)
- Worst-case scenario (e.g. drop in revenues of > 40% with payment difficulties of outstanding debtors within 10-20% of annual revenues)
- Risk scenarios: Loss of employees, loss of suppliers, curfew imposed by the government, border fortifications, complete lockdown, etc.
- Analysis and securing of supply chain
- Analysis of critical dependencies
- IT risks: Home office (partly on a bring-your-own-device basis) makes IT security systems more vulnerable
- Extraordinary events: Blocked goods at the customs, conflicts with business partners, suspension of contractual services, customers in breach of contract (force majeure cases, clausula rebus sic stantibus etc. (cf. also Force Majeure in Contract Law)
- Restrictions on passenger transports
- Government support and insurance issues (tax relief for companies, insurance cover in the event of epidemics and pandemics, liquidity support and COVID-loans)
In the area of taxation, the following measures (amongst others) for combating the Coronavirus have been adopted: Waiver of default interest for late tax payment (different rules on federal and cantonal level), automatic extension of the deadline for tax returns (different regulations depending on the Canton), de-ferral and instalment payments of taxes (generous handling of deferral re-quests by the tax authorities), stop of legal reminders and debt enforcement proceedings regarding taxes (different regulations depending on the Canton; debt enforcement proceedings for federal taxes have been reinstated as of April 20, 2020).
The Federal Council has resolved upon liquidity aid for companies to cushion the economic consequences of the spread of the Coronavirus. For this purpose, the emergency ordinances issued by the Federal Council on March 20, 2020, regulate, inter alia, (i) an emergency aid by means of COVID-bridging-loans guaranteed via sureties («COVID-19-Solidarbürgschaftsverordnung»), (ii) facilitations for tax payments by temporarily waiving of default interest («COVID-19-Verzichtsverordnung») as well as (iii) deferred payments of social security contributions payments of social security contributions.
VI. Financial emergency planning and minimizing of personal liability
In order to protect those companies from the threat of insolvency that run into liquidity shortfalls due to the Coronavirus crisis alone, the Federal Council issued «COVID-19-Verordnung Insolvenzrecht» on April 16, 2020. The ordinance provisions have become effective as of April 20, 2020, and are limited in time for six months. To measures are of particular importance:
(i) A temporary relief from the obligation to report over-indebtedness according to Art. 725 para. 2 CO:
Companies not already over-indebted on December 31, 2019, and which over-indebtedness occurred in the meantime may be remedied by December 31, 2020, are to be released from the obligation to notify over-indebtedness. However, com-panies remain obliged to prepare an interim balance sheet at going-concern values as well as at disposal values if there are reasonable causes for concern for over-indebtedness. Nevertheless, there is now no obligation for the company to notify the court if the over-indebtedness was detected after December 31, 2019. This applies regardless of whether the interim balance sheet shows over-indebtedness at going-concern values or at disposal values. Furthermore, the subsidiary notification obligation of the company’s auditor does not apply as well.
(ii) The implementation of a so-called COVID-19-deferral limited in time:
By means of the COVID-19-deferral SME’s are granted a temporary deferral of three months in an expeditious procedure without the need of a recovery plan. The granted deferral may be extended for a further three months. In addition, unlike the debt-restructuring moratorium, specific restrictions apply to protect certain creditors: Wage claims and alimony claims are not covered by the deferral and continue to be owed unconditionally.
Even though the Federal Council has issued certain temporary facilitations pursuant to the «COVID-19-Verordnung Insolvenzrecht», it is essential that the BoD always keeps an eye on the financial «alarm bells» as provided in the Code of Obligations (Art. 725 CO: capital loss and over-indebtedness) and the measures required by law are undertaken: Convening of a General Meeting, financial reorganisation, interim balance sheet at going-concern values as well as at disposal values, subordinations and notification of the court as a last step (insolvency or composition proceedings with preceding debt-restructuring moratorium pursuant to Art. 293 et seq. SchKG (cf. also Protection of Debtors in case of Liquidity Shortage). According to Art. 754 CO the members of the BoD are personally liable for compliance with these measures. In this regard, it is also very important that the efforts made by the BoD are duly documented as such documentation may be of crucial importance in a potential personal liability case.
Pursuant to the relevant statutory regulations and according to a very strict case law, the BoD is also personally liable for certain tax claims (i.e. corporate income tax at the end of tax liability due to liquidation [both on federal and cantonal level], withholding tax and value added tax) and for social security contributions. Although deferral requests regarding tax payments or social security contributions submitted by the company are currently handled very generously by the authorities and despite the fact, that such deferrals enjoy a waiver of default interests according to the emergency ordinances issued by the Federal Council, the personal liability of the members of the BoD for the deferred claims is still applicable and remains unaffected. If the company is unable to pay its deferred tax or social security debts in the future, the members of the board risk a personal liability. In order to avoid a potential personal liability, we therefore strongly recommend paying outstanding tax bills and social security contributions first and foremost (even before salary payments).
VII. Financial statements 2019 and the General Meeting
The economic effects of Coronavirus have consequences for the accounting. According to EXPERTsuisse, the Coronavirus incident is a non-accounting-recognisable event regarding the annual financial statements as of December 31, 2019. However, disclosure obligations may arise in the notes to the accounts and the management report, respectively. In extreme cases, the spread of the coronavirus may have such a significant negative impact on the company's business that the going-concern assumption could be challenged. Cf. also Coronavirus and Swiss GAAP accounting.
You are supposed to plan your General Meeting in good time. The Federal Council has prohibited public and private events until May 10, 2020. According to «COVID-19-Verordnung 2». special regulations apply to meetings of companies (AG, GmbH, cooperatives, associations, general and limited partnerships). The general meeting’s organizer may order that the participants exercise their rights exclusively in writing or in electronic form (lit. a) or through an independent representative of voting rights appointed by the organizer (lit. b). The mentioned order must be notified to the participants in writing or published electronically at least four days before the meeting (Art. 6a COVID-19-Verordnung 2). Cantonal authorisation is also possible.
Art. 6a COVID-19-Verordnung 2 allows to exercise the shareholders rights in electronic form. As a result, general meetings may be held by video or conference call. It must be ensured that each participant is identifiable/authenticated, may speak at the meeting, listen to the votes of other participants and exercise his rights, in particular the right to vote (this means that all participants must be able to meet electronically at the same time, which is not possible by e-mail). However, the requirement of the image was not implemented in Art. 6a COVID-19-Verordnung 2. In case of a telephone or video conference minutes of the general meeting are still required by law. The corresponding special regulations also apply to agenda items subject to notarization.
MME will provide you with legal and technical support for the digital execution of your General Meeting. We can conduct a general meeting digitally from A-Z (from invitation to application with commercial register) (cf. also New MME service: digital general assembly).
MME is at your disposal with help and advice.
