Directors’ Liability in Switzerland

In Switzerland, all persons entrusted with the management of a company can become liable. This civil liability of managing directors is regulated in article 754 of the Swiss Code of Obligations. The Code of Obligations is thus the most important source for the civil liability of managing directors.

The persons entrusted with the management are:

• the formal officers: persons who are elected to the body, i.e. the board of directors of a public limited company as well as the managing director of a private limited company;
• the material officers: persons to whom the management has been validly delegated (e.g. by statutes or organisational regulations), as well as;
• the de facto officers: persons who factually make decisions reserved for organs or are responsible for the actual management and, thus, have a decisive influence on the formation of the company's will.

For a managing director to be held liable under civil law, the following four conditions must be met cumulatively:

• existence of damage to the company, a shareholder, or a creditor;
• conduct in breach of duty by the responsible person (breach of duty of care): Conduct in breach of duty is any conduct that violates a duty of the responsible person laid down by law or in the articles of association. Omissions may also be in breach of duty if there is a duty to act. The degree of care required is that which a reasonable person would exercise in the same situation. Thus, an objective standard is applied in assessing diligence.
  The Swiss Federal Supreme Court has recognised the Business Judgement Rule as a principle of Swiss company law. The essence of this rule is that the courts should exercise restraint in the subsequent assessment of business decisions, provided that the decision was reached in an impeccable decision-making process based on adequate information and free of conflicts of interest;
• adequate causal link between the damage and the conduct of the responsible person;
• fault on the part of the responsible person: Anyone who has acted either intentionally or negligently is at fault. Whether a conduct was negligent, is also assessed according to an objective standard. Negligent conduct is deemed to have occurred if the executive body did not act in a manner that could be expected of a competent, prudent person in the specific position and situation. The person entrusted with the management has failed to exercise due care.

If several managing directors are responsible for a damage, they are jointly and severally liable. This is the case insofar as the damage is also personally attributable to them due to their own fault and the circumstances. The plaintiff can sue all participants and demand that the court determines the liability for compensation of each of them. Recourse among several participants is also determined by the court.

In situations where special expertise is required, the management is obliged to call in an expert. If they have complied with the requirements regarding careful selection, instruction and supervision, the managing directors act in accordance with the expertise of the experts and if damage nevertheless occurs, the managing directors are not liable for this.

In addition to the Code of Obligations, further sources on liability can be found in tax law, social security law and environmental law.

The company, the individual shareholders, and participants as well as the company's credi-tors are entitled to sue for liability if they have suffered damage.

Managing directors can also commit numerous criminal offences through their actions or omissions. They are personally liable to prosecution if they commit criminal offences in the interest of the company.

The criminal liability of officers (both formal and de facto officers) is governed by article 29 of the Swiss Criminal Code. The responsible persons are liable for the violations of duties they must fulfil for the organisation. A prerequisite for the applicability of the provision is therefore the violation of a special duty that has the effect of justifying or increasing the punishment. This is particularly relevant in connection with pecuniary offences (embezzlement, unfaithful management of a business, bankruptcy and debt collection offences, etc.).

The following offences are of importance in addition to the property offences:

Of particular importance in production companies is criminal liability in connection with negligent homicide or bodily injury due to inadequate safety precautions. Various bankruptcy offences are also relevant, especially the accusation of preferential treatment of creditors. Due to the increasing climate discussions, the Environmental Protection Act with its criminal provisions is also becoming more and more important.

Other areas are financial and capital market criminal law, money laundering criminal law, secret protection and espionage criminal law as well as competition criminal law, corruption criminal law, intellectual property criminal law, economic steering criminal law and criminal tax law.

However, since criminal liability usually requires proof of intent or gross negligence, a criminal conviction of a managing director is less common than civil liability.

In Switzerland, any person is entitled to report criminal offences to the police or the public prosecutor's office and thereby initiate proceedings. If there is suspicion of an offence, the police can also initiate investigations on their own and forward the results to the public prosecutor's office. The public prosecutor's office then decides whether an investigation is to be opened. Likewise, the public prosecutor's office can independently initiate a corresponding procedure or a preliminary investigation.

In civil proceedings, there is a relative limitation period of five years (from the day on which the injured party became aware of the damage and of the person liable to pay compensation), and an absolute limitation period of 10 years (from the day on which the damaging conduct occurred or ceased).

The statute of limitations for prosecution under criminal law depends on the respective offence and the threatened maximum penalty for the respective offence. For the frequently occurring property and bankruptcy offences, the statute of limitations is usually 10 or 15 years.

Lawyers, trustees, bankers, architects, doctors, or insurance brokers who act as directors and officers can also insure their function as directors and officers through their professional liability insurance.

For other professional groups, the only option is directors’ and officers’ liability insurance (D&O insurance). This covers many, but not all aspects of directors' and officers' liability. These are very complex insurances.

Directors' and officers' liability insurance offers insurance coverage to all formal and de facto officers of a company. In principle, it also extends to any subsidiary, provided the parent company holds 50% of the voting rights, or, respectively, 20-50% of the voting rights and nevertheless exercises a significant influence on the management of the subsidiary.

The insurance coverage is determined by the subject matter and the exclusions from the insurance (respective policy), the general and special insurance conditions of the insurance company and the applicable law.

The insurance coverage includes the defense against unfounded claims as well as the compensation of justified claims in case of liability.

In most cases, claims under public law are not covered (fines, tax claims, claims regarding unpaid social security contribution, etc.). Neither are, as a rule, property damage and personal injury, environmental damage, and money laundering. Insurance coverage is also excluded in the event of intentional and, in most cases, gross negligence. For persons holding a position as board member or being a de facto officer it is therefore crucial to carefully analyse the coverage of their respective insurance.

Civil liability is the same for all persons entrusted with the management of the company, regardless of whether they are a formal or a de facto officer. Non executive directors are therefore not responsible for the actions of the company. For independent directors, the decisive factor is whether they are entrusted with the management of the company and have a decisive influence on the formation of the company's will. Finally, the managing directors can also be held liable for the actions of non managing directors within the framework of auxiliary person liability.

Regarding criminal liability, managing directors may be personally liable to prosecution through their actions. Liability under articles 29 of the Swiss Criminal Code only applies to persons who have decision-making power and a management function.

In principle, each company is independently liable for its actions and omissions. This means that a parent company or a holding company is not liable for the liabilities of its subsidiaries. However, doctrine and case law have developed certain groups of cases in which, exceptionally, liability of the holding company for damage occurring in a subsidiary is nevertheless possible:

• liability from de facto management: if the holding company takes over the management and has a decisive influence on the decision-making process in the subsidiary, it acts as a de facto officer of the subsidiary. Since the liability of officers also includes de facto officers, the holding company can make itself responsible through its actions in the subsidiary. Thus, if the parent company controls the appointment of managing directors and the actions of these managing directors, and co-determines them in such a way that itself makes the actual decisions, then the parent company is liable as a de facto officer of its subsidiary;
• liability arising from "passthrough": If the invocation of the autonomy of the various companies appears to be an abuse of rights, a liability pass-through to the parent company is possible;
• liability arising from group corporate trust: In addition, liability of the parent company has been assumed in cases where the parent company has created certain expectations of group responsibility which have then been disappointed in a disloyal manner. A legitimate interest must be abused. In contrast, no protection is deserved by those who merely become victims of their own imprudence or the realisation of general business risks.