Corporate governance
Directors' liability in the event of capital deficiency — a practical handbook
When equity starts to dwindle, the clock is ticking. Here are the decisions the board must take — in the right order.
Few situations test a board of directors more severely than the suspicion that the company's equity has fallen below half of the registered share capital. Chapter 25 of the Swedish Companies Act then sets out a sequence of mandatory measures. Mishandling them entails personal liability for the directors — joint and several, and without limit.
The first balance sheet for liquidation purposes
When there is reason to assume that the company's equity falls below half of the registered share capital, the board must immediately prepare a balance sheet for liquidation purposes (kontrollbalansräkning). "Reason to assume" is a low threshold — an internal forecast or a worrying monthly report is enough.
- The balance sheet must be drawn up in accordance with specific valuation rules.
- It must be reviewed by the company's auditor.
- It must be presented at a first general meeting for liquidation purposes.
The grace period
If the first balance sheet shows that a capital deficiency exists, the company has eight months to restore its capital. If it fails, a second balance sheet for liquidation purposes must be prepared and a second general meeting held. The outcome of the second meeting is decisive — if the meeting does not resolve on winding-up, the board must apply to the district court for compulsory liquidation.
When liability arises
Personal liability is triggered when the board neglects any of the mandatory measures. The liability extends to all obligations incurred during the period of neglect. For a director, that means a single month of inactivity can cost the company's entire new indebtedness.
Strategic decisions along the way
In our experience, the board's most important decisions rarely concern formalities — they concern pace and communication. A swift capital injection from the owners, early dialogue with the bank, or transition to a formal restructuring. Waiting is almost always the most expensive path.
Martiq regularly advises boards of directors on these matters — from the first worrying monthly report to a completed winding-up or successful restructuring.