Capital loss (art. 725 para. 1 Swiss Code of Obligations)

There is a capital loss within the meaning of art. 725 para. 1 of the Swiss Code of Obligations when accumulated balance-sheet losses reach or exceed 50% of share capital plus statutory legal reserves. This threshold triggers a specific duty: the board of directors must promptly call a general meeting and propose remedial measures.

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This regime is distinct from, and less severe than, over-indebtedness under art. 725 para. 2 CO, which additionally requires an audited interim balance sheet and, failing a sufficiently subordinated loan, mandatory notice to the court. Capital loss is, in effect, the first alert threshold, over-indebtedness the second and more serious one.

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For a startup financing its growth through successive raises, this 50% threshold is often crossed well before the company is in real distress: simply accumulating the seed-stage losses budgeted in the business plan can be enough to cross it, without signalling any default risk. The real issue then is less the company's survival than formal compliance with the notification duty, too often overlooked by boards unfamiliar with Swiss company law.

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In financial due diligence of a Swiss SME, checking whether either threshold was crossed in past financial years, and whether the required remedial measures were actually taken, is a governance control point that directly shapes a buyer's risk assessment.