ACCOUNTING
My company has negative equity – what should I do?

Some tips to avoid director's liability!

JE FAIT BEAUCOUP DE COMMERCE À L’EXPORTATION

The liability of companies is limited by their funds, but directors are jointly and severally liable for unpaid debts to the extent of the losses accumulated since the discovery of the over-indebtedness and the bankruptcy of the company. It is indeed their inalienable duty to file for bankruptcy of a company in case of over-indebtedness, but there are alternatives.

Firstly, the easiest thing to do is to postpone the shareholder’s claim. The postposition agreement provides that the claim only accrues to him when the company is able to pay all debts. In other words, there is no need to declare the company bankrupt as long as it is still able to pay the other debts that the shareholder has postponed.

It is also possible that the company’s balance sheet is negative while there are economic values not disclosed in the financial statements. For example, it is possible that the market value of a fixed asset exceeds its book value, the difference being called “hidden reserves”, in which case they must be taken into account when over-indebtedness arises because, in reality, the company has enough – admittedly hidden – funds to honour its debts. Furthermore, already when the loss exceeds half of the share capital and legal reserves (“capital loss”), it is possible to revalue a property or a holding at its market value for accounting purposes if it exceeds its acquisition cost or cost price. This requires a prudent valuation and the certification of the auditor. However, it represents an accounting profit which is subject to tax.

It should also be noted that the company may be in difficulty only temporarily, for example due to the confined or seasonal nature of the business, such as a hotel in the mountains. Thus, a clear and reliable financial analysis shows that the company has every chance of emerging from the debt situation and that it is therefore not necessary to declare bankruptcy.

In any case, it is the responsibility of the directors to be aware of the financial situation of the company and to take measures already in case of a capital loss. This requires a clear and up-to-date view of the ledger. The reform of the Code of Obligations introduces the obligation to audit the accounts in case of a threat of overindebtedness or loss of capital.