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A company rarely goes bankrupt overnight. That is why the law requires the board to warn the shareholders as soon as things threaten to go wrong: the alarm bell procedure. For the managing director it is a duty with serious liability attached. For a supplier it is a signal you can read in the annual accounts.
The short answer
- Deadline
- 2 months
- BV and CV
- Net assets negative or liquidity uncertain
- NV
- Net assets below half the capital
When does the alarm bell go off?
The threshold depends on the legal form. Since the Belgian Companies and Associations Code (BCCA), the BV no longer has capital, and therefore no capital-based threshold either.
| Legal form | Article | The alarm bell goes off if |
|---|---|---|
| BV/SRL | 5:153 BCCA | the net assets are negative or threaten to become negative, or it is no longer certain that the company can pay its debts as they fall due over the next twelve months |
| CV/SC | 6:119 BCCA | the same two tests as for the BV |
| NV/SA | 7:228 BCCA | the net assets fall below half of the capital as a result of losses; again if they fall below a quarter |
The balance sheet test: net assets
Net assets are everything the company owns, minus provisions and debts. In practice they are calculated as for the distribution test (art. 5:142 BCCA): formation expenses and research and development costs that have not yet been written off do not count. A simple example:
| Garage Peeters BV, balance sheet at 31 December | Amount |
|---|---|
| Total assets | EUR 420,000 |
| Of which formation expenses not yet written off | EUR 5,000 |
| Provisions | EUR 10,000 |
| Debts | EUR 440,000 |
| Net assets (420,000 minus 5,000 minus 10,000 minus 440,000) | minus EUR 35,000 |
The net assets are negative, so the board must sound the alarm bell. "Threaten to become negative" means the board may not wait until the annual accounts confirm it: if the interim figures show that losses are going to eat up the equity, the deadline already starts running.
The liquidity test: twelve months ahead
The second test in a BV and CV looks not at the balance sheet but at cash. Even a company with positive equity must sound the alarm bell if the board finds that it is no longer certain the company can pay its debts over the next twelve months as they fall due. Think of a large customer dropping out, a bank not renewing a loan or a tax assessment on its way. The board must assess this "according to developments that can reasonably be expected", so with a realistic cash plan, not by hoping for a miracle.
Read also Distribution test and liquidity test, when can a BV pay a dividend?The procedure step by step
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Establish the situation
The board monitors the figures and finds that a threshold has been crossed. The deadline runs from that finding, or from the moment the board should have established the situation under the law or the articles of association. -
Write the special report
If the board does not propose dissolution straight away, it sets out in a special report which measures should safeguard continuity: cutting costs, new capital or a subordinated loan, an agreement with the bank, a judicial reorganisation (WCO/PRJ). In an NV this report is available for inspection at the registered office fifteen days in advance. -
Call the general meeting
The meeting must take place within two months of the finding. The report is on the agenda. If it is missing, the meeting's decision is void. -
Let the shareholders decide
The meeting chooses between the proposed measures and dissolution. In an NV whose net assets fall below a quarter of the capital, a quarter of the votes cast is enough for dissolution. -
Follow up
In a BV and CV, the board does not have to call the meeting again for the same reason in the twelve months after the first notice. If the situation still exists after that, the procedure starts again.
Directors' liability
The alarm bell has teeth. A board that ignores it puts its own assets at stake, in three ways:
- Presumption of causation. If the meeting was not called according to the rules, the damage suffered by third parties is presumed to result from that failure, unless proven otherwise (art. 5:153, § 3, 6:119, § 3 and 7:228 BCCA). A supplier who kept delivering after the failure therefore does not have to prove himself that a timely alarm bell would have spared him the damage.
- Ordinary directors' liability. A breach of the BCCA makes the directors jointly and severally liable (art. 2:56 BCCA). That liability is capped, from EUR 125,000 for the smallest companies to EUR 12 million for the largest (art. 2:57 BCCA), but the cap falls away among other things in case of serious fault, fraudulent intent and repeated minor faults.
- In a bankruptcy. The trustee can hold liable directors who knew or should have known that there was clearly no longer any reasonable prospect of avoiding bankruptcy, and who then did not act as a normally prudent director (art. XX.227 Code of Economic Law, wrongful trading). In addition, a manifestly gross fault that contributed to the bankruptcy can lead to liability for the shortfall (art. XX.225 Code of Economic Law), except for the smallest businesses.
In those proceedings an ignored alarm bell is a strong argument for the trustee. Conversely, a realistic cash plan drawn up in time is the best proof that the board acted with care.
How often it happens
- 13.1%
- of companies closed financial year 2024 with negative equity
- 19%
- of those with negative equity in 2019 had ceased trading five years later
- 1 in 3
- has fewer current assets than short-term debts in its latest annual accounts
73,743 of 564,007
9% for companies with positive equity
current ratio below 1
So the balance sheet test goes off at more than one in eight companies. How many of them actually called a general meeting, nobody knows: the special report is not published. And a current ratio below 1 is not an alarm bell in itself, but it is the first question the liquidity test asks: can the company carry its short-term debts?
Read also Negative equity, what it means and how serious it isWhat you see in the annual accounts as a creditor
The special report and the minutes of the meeting are not public. What you can see is in the annual accounts and the Belgian Official Gazette. This is how to read it:
- Equity (code 10/15) below zero. In a BV or CV that almost always means the balance sheet test goes off. Also look at the direction over three years: equity that falls further every year is more serious than a one-off dip.
- Accumulated loss (code 14). In an NV you compare equity with the capital (code 10): if equity is less than half the capital, the alarm bell applies.
- Short-term debts against current assets. A current ratio that falls below 1, especially together with little cash, touches the liquidity test.
- Debts to the tax authorities and the NSSO. A rising item of debts relating to taxes, remuneration and social security (owed to the tax authorities and the National Social Security Office) often points to a cash shortfall.
- The going concern justification. Companies that draw up an annual report must justify the going concern basis in it if the balance sheet shows an accumulated loss or if there was a loss two years in a row (art. 3:6 BCCA). That paragraph is worth reading.
- Deeds in the Belgian Official Gazette. A capital increase, a new contribution or the conversion of a debt into capital can be a recovery measure after the alarm bell. A proposal to dissolve is published there too.
What you do as a supplier
Negative equity is no reason to drop a customer straight away: a third of those companies are back in positive territory five years later. It is a reason to limit credit. Ask for a down payment or shorter payment terms, put a retention of title clause in your terms and conditions and monitor the customer. On Jaarrekening.be the company page shows equity, the ratios and the Health score over several years. With a free account you follow up to five customers and get an email as soon as there are new annual accounts or a publication.
Read also Setting a customer credit limit, how much credit do you give?In short
The alarm bell forces the board to act before it is too late: in a BV and CV as soon as the net assets are negative or threaten to become negative, or cash for the next twelve months is no longer certain, in an NV as soon as the net assets fall below half of the capital. The shareholders must decide within two months. For the director that is a duty with personal liability. For you as a creditor, the negative equity in the annual accounts is the visible sign that the procedure should have been running.