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Directors’ Liability in Switzerland

27-10-2014

 

  1. Principles of directors liability

 

a)    No specific supervisory body

As distinguished from other Law Systems, Swiss Law does not provide a specific supervisory body. Although the members of the board of directors have supervisory tasks, they also are charged with executive and management decisions for which reason the board of directors cannot be described as a proper supervisory body.

 

b)    Own act or delegation

The members of the board of directors are not only allowed to act in their given sphere of competences but are as well empowered to delegate management functions and the day-to-day business to specific members or to third parties. The members of the board of directors therefore can be held liable not only for their own acts but also for the acts of a third party which causes a loss or damage.

 

c)    Liability for own breaches of duties

According to Art. 754 I Swiss Code of Obligations the members of the board of directors and all persons engaged in the business management or liquidation of the company are liable both to the company and to the individual shareholders and creditors for any losses or damage arising from any intentional or negligent breach of their duties. Art. 754 I involves not only formal but also factual positions. The mentioned regulation therefore is applicable to formal bodies and to persons belonging to such bodies. Furthermore it is likewise applicable to persons making decisions reserved to a formal body of a company and by acting so having an important influence on the decision-making of the company.

 

d)    Liability for delegation

Art. 754 II Swiss Code of Obligations provides that a person who, as authorised, delegates the performance of a task to another governing officer is liable for any losses caused by such officer unless he can prove that he acted with all due diligence when selecting, instructing and supervising him. The delegation relieves him of liability if the person was authorised to delegate and if he is able to prove, that the officer was eligible according to his education, professional qualifications and character (cura in eligendo), that he received the instructions needed for the correct completion of the task (cura in instruendo) and that the delegating body has fulfilled its obligatory supervision (cura in custodiendo).

 

  1. Requirements for the directors liability

 

In order to hold the members of the board of directors and all persons engaged in the management of the company liable for their own acts according to Art. 754 I of the Swiss Code of Obligations the following requirements have to be met cumulatively:

 

a)    Specific formal or factual position

The acting person has to be in a position as

-       a formal member of the board of directors or

-       a person engaged in the business management or liquidation of the company or

-       a person making decisions reserved to a formal body of a company and by acting so having an important influence on the decision-making of the company

 

b)    Damage

Damage is the difference between the actual assets and the hypothetical assets without breach of duties. Depending on which legal estate is concerned by the damage it is distinguished between consequential and direct damage.

 

aa) Consequential damage

The company is affected by the damage. The shareholders and creditors have not a direct but only a consequential damage. The shareholder’s claim is for performance to the company.

 

bb) Direct damage

Only the shareholders and creditors – and not the company – are affected by the damage.

 

c)    Illegality – breach of duty

The members of the board of directors or the directors are liable for the damage which is caused as a result of the breach of specific company-law duties.

 

d)    Adequate causal connection

There has to be an adequate causal connection between the breach of specific company-law duties and the damage.

 

e)    Fault

The liability exists for losses or damage arising from any intentional or negligent breach of their duties, even for slight negligence.

 

To be liable for authorised delegation to a third party Art. 754 II Swiss Code of Obligations demands the same requirements. If there can be brought forward proofs that the delegated officer was eligible according to his education, professional qualifications and character (cura in eligendo), that he received the instructions needed for the correct completion of the task (cura in instruendo) and that the delegating body has fulfilled its obligatory supervision (cura in custodiendo) than the liability does not apply.

 

  1. Direct liability in front of company’s creditors

 

Theoretically there can be a direct liability of members of the board of directors or of directors if shareholders or creditors independent of a company’s damage are directly damaged. In this case those shareholders and creditors have autonomous claims for damages against the person responsible. There is an exemption in the event of the insolvency of the company and if the company is itself directly damaged.

 

  1. Company’s insolvency

 

a)    Claims outside insolvency

In addition to the company, the individual shareholders are also entitled to sue for any losses caused to the company. The shareholder’s claim is for performance to the company (Art. 756 I Swiss Code of Obligations).

b)    Claims in insolvency

In the event of the insolvency of the damaged company, its creditors are entitled to request that the company be compensated for the losses suffered. However, in the first instance the insolvency administrators may assert the claims of the shareholders and the company’s creditors (Art. 757 I Swiss Code of Obligations).

Where the insolvency administrators waive their right to assert such claims, any shareholder or creditor is entitled to bring them. The proceeds are first used to satisfy the claims of the litigant creditors in accordance with the provisions of the Debt Collection and Bankruptcy Act of 11 April 1892. Any surplus is divided among the litigant shareholders in proportion to their equity participation in the company; the remainder is added to the insolvent’s estate (Art. 757 II Swiss Code of Obligations).

The assignment of claims held by the company in accordance with Article 260 of the Debt Collection and Bankruptcy Act of 11 April 1892 is reserved (Art. 757 III Swiss Code of Obligations).

Because of the fact that in the event of the insolvency of the damaged company its creditors are only entitled to request that the company be compensated for the losses suffered, there does not exist the creditor’s possibility for a direct claim in his own favour.

 

  1. Liability for failed or delayed notification

 

The board of directors must notify the court in case of an overindebtedness in accordance with Art. 725 II Swiss Code of Obligations. If the board of directors fails to do so or if the notice is delayed, the damage for the company most likely increases. The members of the board of directors are liable for such an increase of the damage.

 

  1. Specific action against director?

 

As mentioned in items 2b) bb) and 3 supra creditors may not bring claims against directors of a solvent company based on directors’ liability, unless they have suffered a direct damage. In this case there is no specific action, the creditor would have to sue for damages and the tort law principles as also outlined in item 2 supra would apply. Statistically, outside insolvency direct suits against directors areseldom filed.

 

  1. Liability of other persons

 

Under Swiss law the directors’ civil liability does not depend on the formal function. Rather all persons „at the helm of the company“, i.e. all persons actually participating in the decision making (be it a major shareholder or even a bank as quasi master-mind in the background) are liable like directors provided the other requirements mentioned in item 2 above are met also.

 

  1. Duration of liability claims

 

As liability claims are often quite complex with respect to establishing the facts, which should convince a court that all the requirements mentioned already are met, it usually takes more than one year to obtain a decision in the first instance. An appeal may prolong the procedure for up to another 2 years. A temporary enforcement of financial claims pending a court decision is almost impossible in Switzerland.

 

  1. Arbitration clause in the by-laws

 

To include an arbitration clause in the company’s by-laws for liability claims is generally not feasible under Swiss law. Since the directors are not necessarily shareholders and according to Art. 358 of the Swiss Code on Civil Procedure an arbitration agreement has to be in writing, an arbitration clause in the by-laws would not be binding on directors, let alone on creditors. It would also not be valid for shareholders, who acquire shares at a later stage unless they agree in writing to explicitly submit themselves to arbitration also.

 

  1. Fees and costs

 

The court fees and costs will be different in each Canton (state) in Switzerland, but basically it will always be computed as a percentage of the amount claimed. For low five digit amounts it could be slightly over 20%; the higher the amount, the lower the percentage will be, for a high six digit amount it may fall below 5%. The same system is applied by the courts to calculate the compensation for attorneys’ fees payable by the unsuccessful party to the other one, but the percentages differ more: the range goes from 60% to 6% or less.

 

  1. Estimation of fees

 

It is very difficult to estimate the attorneys fees in liability claims, as –like mentioned already- they can become quite complex. The usual approach is to follow the court guideline for the calculation of the compensation of the attorneys’ fees. The downside of this method is that one cannot predict how many hearings the court will fix, how many briefs have to be filed and how many hours will be spent on taking evidence and therefore may be quite inaccurate in a specific case.

 

December 30, 2013