Conditions for Liability
A member of the board of directors can only be held personally liable if they breach their statutory or regulatory duties and this breach results in damage to the company, a shareholder or a creditor. If, however, the board member acts within their authority and performs their duties diligently and properly, no personal liability arises. It is also crucial that liability does not attach to the board as a collective body, but rather to each individual member.
Four conditions must be cumulatively fulfilled for liability to arise. The burden of proof for all elements lies with the injured party.
- Breach of Duty
First, it must be examined whether a member of the board of directors has breached a duty. These duties arise from the law, the articles of association or resolutions of the company. Of particular relevance are the non-transferable and inalienable duties pursuant to Article 716a of the Swiss Code of Obligations, such as strategic management, organisational structuring, and financial control and planning. Further duties can be derived from Article 717 of the Swiss Code of Obligations, which stipulates that the interests of the company take precedence over the personal interests of board members. This includes, inter alia, the duties of care and loyalty, the principle of equal treatment of shareholders, and the obligation to promote the success of the company.
- Damage
Furthermore, a concrete damage must have occurred. Damage is defined as the difference between the company’s assets before and after the harmful event. In practice, damage often arises when a board of directors files for bankruptcy too late. Had the company entered bankruptcy earlier, the damage would generally have been lower.
The calculation of damage therefore involves comparing the actual financial position at the time bankruptcy proceedings are opened with the hypothetical financial position at the time of a timely, i.e. earlier, bankruptcy. Since no financial statements exist for this hypothetical point in time, they usually need to be reconstructed and converted into liquidation values.
- Adequate Causal Link
There must be a natural and adequate causal link between the breach of duty and the damage incurred. This means that the breach of duty must be the cause of the damage and, according to general life experience, the conduct must be capable of causing such damage. If the damage would inevitably have occurred even with proper conduct, the requirement of adequacy is not met and liability is excluded.
- Fault
Finally, fault is required. An objective standard applies: a board member acts culpably if they do not behave as a diligent person in the same position would under the same circumstances. Even slight negligence is sufficient to establish liability.
No Liability for Business Judgement Errors
Not every business decision that later turns out to be incorrect automatically leads to liability. Managing a company is always associated with uncertainties and risks. However, if the board of directors can demonstrate that a decision was made on the basis of careful and thorough assessments, there is no breach of the duty of care and liability does not arise.
If you have any questions relating to company law, the attorneys-at-law at Pilatushof AG will be pleased to provide you with advice.