A payment bottleneck, a failure to report, or a poorly documented decision, and suddenly board members are personally liable with their private assets. What many underestimate is that in Switzerland, directors’ and officers’ liability is not a theoretical risk, but a reality. Board members and members of the executive board are liable if they violate their legal obligations and cause financial damage to the company, its shareholders or (in the event of bankruptcy) its creditors. This makes it all the more important to know when liability is a threat and how to protect yourself.
Who can be held liable?
Responsibility under Art. 754 OR does not only apply to formal bodies such as boards of directors and auditors. Liability also extends to material bodies and even to so-called de facto bodies. These include persons who actually make business decisions or exert significant influence, even if they do not appear to be bodies to the outside world.
These include, for example:
- Managing directors or directors with powers delegated by the BoD
- Influential major shareholders
- Persons who, for whatever reason, effectively control the management of the company
- Under certain circumstances, influential advisors or lenders
Legal action can be taken not only by the company itself, but also by shareholders and creditors.
When does liability arise?
For a governing body to be liable, four conditions must be cumulatively met:
- A breach of duty: A legal or statutory duty has been breached.
- Damage: The company has suffered a financial disadvantage.
- A causal link: The breach of duty must be the cause of the damage.
- Fault (intentional or negligent).
The core duties of the board of directors
The duties of the board of directors arise primarily from the law, the articles of association and resolutions of the general meeting (GM). The key duties are those that are non-transferable and non-revocable (Art. 716a para. 1 OR):
- the overall management of the company
- the organisation of the company
- the structuring of accounting and control
- the supervision of management
Special duties in a crisis
If the company is in financial difficulty, the liability risk increases dramatically, as special urgency is required. As soon as payment problems arise, the board of directors is obliged to:
- monitor solvency on an ongoing basis
- initiate restructuring measures in good time
- notify the court in the event of over-indebtedness and hopeless restructuring
Strategic misjudgements do not directly lead to liability
Not every strategic misjudgement automatically leads to liability. The courts recognise the so-called business judgement rule:
as long as it is a business decision that has been made on a careful basis, is free of conflicts of interest and is based on comprehensible information, the court will not rule that one should have known better in hindsight. It is not the result that is decisive, but the decision-making process.
How can board members minimise their risk?
The best protection is active action and clear organisation:
- timely and thorough preparation of meetings
- critical review of documents
- complete and accurate minutes
- clear documentation of decisions
- written organisational regulations
- clear definition of responsibilities
- avoidance or management of conflicts of interest (e.g. through abstention)
In short: those who work cleanly protect themselves.
Protection through D&O insurance
Directors’ and Officers’ Liability Insurance (D&O insurance) minimises financial risk.
Among other things, it covers:
- Claims for damages,
Legal defence costs,
However, this insurance should be treated with caution: D&O works according to the claims-made principle. Only claims made during the term of the policy are insured, not those that occurred during the course of the activity. Since liability claims often arise years later, sufficient follow-up coverage is crucial. In practice, this is often too short. Insurance coverage can also be jeopardised in the event of bankruptcy, for example if premiums are no longer paid.
Conclusion
Director and officer liability primarily implies real and personal risk. As long as you are aware of your duties, document everything clearly, define responsibilities clearly and have your insurance management (D&O policy) under control, this risk is significantly reduced. In contrast, passivity, ambiguity and poor organisation are the most common causes of liability cases.
