Analysis of the alarm bell procedure from an annual accounts’ perspective under the CAC

On 12 October 2021, the Accounting Standards Commission (ASC) published an advice on the alarm bell procedure under the Companies and Associaties Code (CAC). The application of the alarm bell procedure depends to a large degree on the valuation rules applied by the management body. Directors applying these rules correctly can avoid the special liability which might apply.

Alarm bell procedure and net assets

When a company’s net assets decrease under certain thresholds, the management body should convene the company’s general shareholders meeting and management should propose measures to assure the company’s continuity. The general meeting can then decide what it will do with these proposed measures.

The term ‘net assets’ is also used when dividends are concerned. The net assets of a company cannot become negative due to the distribution of dividends.

These rules already existed under the previous Company Code, but the definition of ‘net assets’ was different depending on whether is concerned the alarm bell procedure or the distribution of dividends. Under the old legislation ‘net assets’ was:

for the alarm bell procedure equal to total assets less provisions and debts.

for the distribution of dividends equal to total assets less provisions, debts, non-depreciated goodwill and formation expenses, and – with certain exceptions – the non-depreciated amounts of research and development.

Under the CAC only one definition remains: the net assets:

equals the total assets less provisions, debts and – with certain exceptions to be noted and motivated in the explanatory notes with the annual accounts – the non-depreciated amount of goodwill, formation expenses and the amounts of research and development.

The new definition is therefore the same as the ‘old’ definition for dividend distribution purposes.

Note that the ASC does not mention in which exceptional circumstances the R&D costs should not be deducted.

Alarm bell procedure thresholds in the NV

The alarm bell ‘rings’ when, as due to losses of the company, its net assets have decreased:

below half of the capital, or

below one fourth of the capital. In this case the dissolution of the company can be decided with one fourth of the votes.

Finally, every stakeholder or the public prosecution office can demand the dissolution before court in case the net assets have decreased below the threshold of 61.500.

The ASC defines capital for an NV as the ‘subscribed capital’, which equals liability post I.A.1 on the balance sheet.

Alarm bell procedure thresholds in the BV and the CV

For the companies without capital, the alarm bell procedure should be applied when:

the net assets of the company threaten to become negative or became negative. Note that there should be no ‘suffered losses’ to determine the decrease of the net assets.

the management body assesses that it is no longer sure that the company, according to the reasonably to be expected developments, during the next twelve months will be able to pay its debts, as they become due.

Watch out: the alarm bell procedure is compulsory law. The company’s articles of association can proscribe stricter rules, but not easier ones!

Role of the management body and timing

The management body which assesses that the net assets are below the subscribed capital or threatens to become negative, should start the alarm bell procedure. Both assessing the threshold and the timing of the exceeding are crucial.

The ASC indicates that the management body is obliged to check whether the application conditions for the alarm bell procedure are fulfilled each time a legal or statutory provisions states that the financial condition of the company should be charted. Surely this is the case for the annual accounts. But it can also be the case when drafting provisional annual accounts, half-yearly accounting statements which should be communicated to the statutory auditor, a quarterly statement for the works council, a (intermediate) statement of assets and liabilities for other transactions, .. The articles of association can provide for stricter rules.

Besides, the management body is obliged to ‘continuously and timely’ confer each time important and corresponding facts arise which can jeopardise the continuity of the company.

Valuation rules in going concern

When drafting the annual accounts, the management body chooses the applicable valuation rules. These valuation rules have an important impact on the determination of the net assets. The ASC prescribes that the valuation should be that the company will continue its activity. The statements on the basis of which – in the context of the alarm bell procedure – it should be determined whether or not threshold are exceeded, should in principle be drafted in going concern.

As a general rule, the valuation rules cannot be changed from one accounting year to another. But the management body can, when drafting the annual accounts, not neglect important changes in the activity of the company. In the event that the actual valuation rules no longer give a true and fair view on the capital, the financial position and the result of the company, they should be contested.

Discontinuity

If the management body assesses that the company cannot longer be continued, the valuation rules should be modified to a situation of discontinuity. This means that:

the formation costs should be fully depreciated;

for the fixed and current assets, if necessary, additional depreciations or devaluations should be registered in order to reduce the book value to the expected realisation value;

a provision should be made for expenses related to the end of the activities, especially for the allowances to be paid to the personnel.

The Belgian accounting regulations contain no provisions on the timing for determining the continuity assumption. The ASC considers that reasonably the management body should assess the continuity of the company over a period of at least twelve months, counting as from the closing date of the accounting year.