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04 May 2010
Supreme Court decision
In a recent decision (4A 61/2009), the Supreme Court had the opportunity to comment on the requirements regarding founders' liability and the calculation method for the respective damages under company law, in particular for a limited liability company. The court held that the common definition of the term 'damages' applied, as opposed to a specific meaning of the term as has been argued for in legal literature.
In the case at hand, the claimants argued that the two founders of a limited liability company were liable because the sole asset of the company, incorporated by means of a contribution in kind, had not been validly transferred to the company upon its foundation, which eventually caused the company's insolvency.
According to Article 827 of the Code of Obligations, the provisions of the Stock Corporation Law are applicable by analogy with regard to the liability of persons participating in the foundation of a limited liability company.
Pursuant to Articles 753(1) and 753(2) of the code, founders, members of the board of directors and all persons participating in the establishment of a company will be responsible to the company, individual shareholders and company creditors for the damage if they:
The liability under Article 753 requires:
The Supreme Court had to consider an appeal by the two founders of a limited liability company under Swiss law. The district court had approved a company creditor's claim on the grounds that the company did not have an unconditional claim to register its sole asset – real estate contributed in kind by the founders – in the Land Register, as is required by Article 634(2) of the code. The appellate court upheld the district court's decision, whereupon the two founders appealed to the Supreme Court.
The limited liability company was founded with a company capital in the amount of Sfr20,000. In addition, assets in the amount of Sfr659,345 and liabilities of Sfr557,880 of an individual enterprise were assumed by the limited liability company. The sole asset was asserted to have been contributed in kind and designated as such in the articles of association. However, the transfer of ownership never validly occurred. This meant that the acquisition agreement and balance sheet considered an asset which was not, in reality, at the company's disposal. The claimants argued that the founders had thereby committed a breach of duty stipulated in Article 753 of the code, triggering their liability.
The Supreme Court took the opportunity to clarify the definition of 'damages' in the context of founder's liability. In addition to damage, causal nexus and fault, a breach or neglect of duty in the sense of Articles 753(1) to 753(3) of the code is required in order to hold founders liable. Regarding the only asset, the court held that at no point was a transfer of property to the limited liability company performed. Likewise, the company did not receive any unconditional claim to registration in the Land Register. Nevertheless, the property was mentioned in the articles of association as a contribution in kind with a value of Sfr659,345.93. Hence, the contribution in kind was mis-stated in the articles of association in the sense of Article 753 of the code (ie, it was overstated by Sfr659,345.93). Consequently, the founders had violated their duties pursuant to Article 753 of the code.
Regarding quantum, the court clarified that the common definition of 'damages' applies with regard to the liability of founders. Thus, 'damages' are defined as an unintentional decrease in net worth, consisting of a decrease in assets, an increase in liabilities or loss of profits. Damages are equal to the difference between the present amount of assets and the amount of assets which would exist in the absence of the damaging event. As a result, the court ruled that damages in case of founders' liability are not limited to the outstanding payment under subscription, but rather may well exceed it. In the case before the court, the founders' damages equalled the difference between the actual value of the contribution in kind and the amount credited to the registered capital. Since the sole asset was considered as valueless, the actual value of the contribution in kind was negative (ie, -Sfr557,880), as only liabilities in this amount had been transferred, but no assets. As a result, the damages were assessed at Sfr577,880.
In the context of founders' liability of a limited liability company, the common definition of 'damages' applies rather than a specific meaning. Where the only asset, incorporated by means of a contribution in kind, is not validly transferred to the company, the damage amounts to the actual value of the contribution in kind (ie, the amount of transferred liabilities) and the amount credited to the registered capital.
For further information on this topic please contact Markus Dörig or Alexandra Bösch at BADERTSCHER Rechtsanwälte AG by telephone (+41 44 266 20 66), fax (+41 1 266 20 70) or email (firstname.lastname@example.org and email@example.com).
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