Introduction
Organisational defects
Measures
Comment
Introduction
Article 731(b) of the Code of Obligations entered into force on January 1 2008. It provides that when a company lacks the required corporate body or if the composition of one of these corporate bodies does not comply with the law, any shareholder, creditor or the commercial registrar may request the court to take the required measures. Article 731(b) of the code is applicable to companies limited by shares, to limited liability companies and to cooperative companies.
Article 731(b) of the code covers only cases in which mandatory legal requirements are infringed and facts relating to the entry in the Commercial Register and supporting documents.
As to the cases in which Article 731(b) of the code was applied by Swiss courts during the first three-and-a-half years of application of this new provision, many cases dealt with companies where:
- no board of directors had been appointed (Article 707 of the code);
- no chairman had been appointed (Article 712 of the code);
- no auditor had been appointed (Article 727 of the code); or
- the obligation to have a domicile in Switzerland and to have a Swiss-domiciled person entitled to sign for the company had not been met (Article 718 of the code).
Where an appointed auditor does not meet the legal requirements regarding qualification and independence, this can also be regarded as a deficiency. The qualification to act as auditor results from holding a licence from the Federal Oversight Authority. An auditor who operates without a licence represents a 'deficient body' within the meaning of Article 731(b) of the code. Shareholders, creditors and the commercial registrar enjoy the legal right to demand from the court that this deficiency be remedied.
According to Swiss case law and doctrine, the Swiss courts are free to choose the most appropriate remedy. In taking its decision, the court is not bound by the terms of the petition or request.
Article 731(b) of the code provides that the court may take, in particular, the following measures to remedy the organisational defects:
- allowing the company a period of time, under threat of its dissolution, within which to re-establish the lawful situation;
- appointing the required corporate body or an administrator; or
- dissolving the company and order its liquidation according to the regulations on insolvency proceedings.
The majority of petitions based on Article 731(b) of the code are filed by commercial registrars. In such cases, before filing the petition to the court, the commercial registrar must have set a deadline to the company to remedy the organisational defect within 30 days. Upon the expiry of this deadline, the commercial registrar may apply to the court to take the appropriate measures. In most cases, upon receipt of a request from the commercial registrar, the court will set a deadline to the company to remedy the organisational defect under threat of dissolution pursuant to Article 731(b)(1)(1) of the code. This deadline may be extended upon request of the company. Only as a last resort will the courts order the dissolution of the company if a the company fails to remedy the defect within the set deadline.
According to Article 731(b)(1)(2) of the code, the court may appoint the required body or an administrator. A provisional director, for instance, may be appointed at the discretion of the court if it appears that such action by the court will remedy a deficiency in the company's organisation. The appointment of a provisional director can be indicated in cases in which the directors of the board are deadlocked in the management of the corporate affairs, the shareholders are unable to unlock this deadlock, and damage to the company is threatened or being suffered. In case of such a deadlock a petition based on Article 731(b) of the code can be filed by any shareholder. Article 731(b) of the code does not require a minimum level of stock ownership for the commencement of proceedings. Therefore, a shareholder owning one share could theoretically petition a court for the appointment of a provisional director. A provisional director appointed by a court has all the rights and duties of a duly appointed director until such time as he or she is removed by order of the court.
If a company becomes aware that a creditor is planning to file a petition based on Article 731(b) of the code, the company can thwart such an action by satisfying the creditor's claim so that it no longer has standing to file a petition as creditor.
If the court appoints the missing corporate bodies or an administrator, it specifies the duration of the validity of the appointment. It obliges the company to bear the costs and to provide an advance payment to the appointed person(s) (Article 731(b)(2) of the code). The courts appear to favour the appointment of an administrator in charge of reinstating the legal situation over the appointment of the missing body, as this allows the court more flexibility and leaves more at its discretion. The court may appoint an administrator to manage the affairs of the company. In one atypical case, a Swiss court appointed an administrator based on Article 731(b)(1)(2) of the code to deal with a bank account in Switzerland which belonged to a bankrupt Liechtenstein company.
The legal status of an administrator appointed by a court based on Article 731(b)(1)(2) is not regulated by law. The legal status is similar to the one of the administrator nominated by the court under Article 725(a) of the code in case of stay of bankruptcy of an over-indebted company.
The court may, under Article 731(b)(1)(3), order the dissolution of the company and its winding up pursuant to the bankruptcy rules as provided for in the same article. The court has no obligation to first set a deadline to the company for reinstatement if it appears from the outset to be the most appropriate measure. However, in most cases, the court will first set a deadline for the company to remedy the organisational defect.
Since the entry in force of Article 731(b) of the code, many Swiss companies have been dissolved by courts and struck off the Commercial Register, pursuant to the bankruptcy rules as provided for in Article 731(b)(1)(3). During the period between January 2011 and July 2011, 1,199 Swiss companies were rendered insolvent based on Article 731(b).
A company that has been dissolved by the court pursuant to Article 731(b) of the code is not entitled to apply for restoration and reinstatement following judicial dissolution and entry of the dissolution in the Commercial Register.
In light of Article 731(b) of the code, Swiss companies' boards of directors must ensure that the mandatory provisions regarding organisation have been complied with on a constant basis. Failure to comply with the mandatory rules regarding a company's organisation can result in its judicial dissolution. Further, a company that has been struck off the Commercial Register based on Article 731(b) of the code is barred from applying for restoration.
For further information on this topic please contact Markus Dörig or Olivier Bauer at BADERTSCHER Rechtsanwälte AG by telephone (+41 44 266 20 66), fax (+41 44 266 20 70) or email ([email protected] or [email protected]).