The financial year has closed with €80,000 of profit and you want to pay part of it out. It used to be enough that the profit was there. Since the Belgian Companies and Associations Code of 2019 a BV (private limited company) no longer has share capital, and in exchange it received a double safety belt: every distribution must pass a net assets test and a liquidity test. Whoever skips them risks the dividend being clawed back and the director personally paying for the damage.
Why the BV got two tests
Until 2019 the share capital protected the creditors of a BVBA: a minimum amount the shareholders could not distribute. The Companies and Associations Code abolished that capital. A BV can now be incorporated with one euro of contribution. In exchange, the protection shifted from a fixed amount to a test at every distribution: no longer "is there enough capital", but "can the company still pay what it has to pay after this distribution".
The logic is the same as for a private person: someone who has €80,000 in the account but owes €100,000 to suppliers and the bank next month cannot afford a gift of €50,000. The difference between profit and available money is explained in profit versus cash flow.
Test 1: the net assets test
The first test is in article 5:142 of the Code and is arithmetic. The company's net assets may not become negative through the distribution. The net assets are the equity as shown in the latest approved annual accounts, with two corrections:
- the not yet amortised amount of formation and expansion expenses is deducted;
- the not yet amortised amount of research and development costs is deducted, unless the articles of association provide otherwise.
If the BV has unavailable equity, for example a contribution the articles make unavailable or a reserve imposed by law, the net assets after the distribution may not fall below that either. What remains is the maximum distributable amount.
This test belongs to the general meeting, which decides on the distribution. A distribution that fails the test is void.
Test 2: the liquidity test
The second test, article 5:143, is not a formula but a judgement. The board may only execute the distribution once it has established that the company, according to developments that can reasonably be expected, can continue to pay its debts after the distribution as they fall due over a period of at least twelve months.
For that the board looks beyond the balance sheet: the rent of the coming months, loan repayments, planned investments, the VAT settlement, holiday pay and the expected income. It records its judgement in a report that is not filed but must be kept. In a later dispute or bankruptcy, that report is the proof that the board did its job.
Continuing the worked example: the BV has €200,000 of current assets and €140,000 of debts falling due in the next twelve months. The current ratio is 1.43. After the dividend of €50,000, 150,000 of current assets remain: the ratio drops to 1.07. That is tight. The board can justify the distribution if the expected income is stable, but a dividend of €80,000 would push the ratio below 1 and is then not defensible, even though it passes the net assets test comfortably.
Which distributions fall under the test?
Everything that moves assets from the company to the shareholders or directors:
- the ordinary dividend after the annual meeting;
- an interim dividend during the financial year;
- a director's bonus (tantième);
- the buy-back of own shares and the payment on withdrawal or exclusion of a shareholder;
- a repayment of contribution, what used to be called a capital reduction.
A remuneration for work performed does not fall under it, but a tantième does: that is profit sharing, not salary.
What the director risks
The sanction is in the same articles and is twofold:
- Clawback. The company can reclaim a distribution made in breach of the tests from the shareholders, even if they acted in good faith. That is stricter than before, when good faith protected the shareholder.
- Joint and several liability. The directors are jointly and severally liable towards the company and towards third parties for all damage resulting from the distribution. A supplier that remains unpaid because the cash left as a dividend can therefore knock on the directors' door personally.
In a bankruptcy this is one of the first points a trustee checks: was there a distribution in the last year, and is there a report of the liquidity test? Without a report the director is in a weak position. A supplier left with an unpaid invoice will, by the way, find the distribution in the customer's annual accounts, under the appropriation of the result (code 694).
The alarm bell procedure: when distributing is excluded
The two tests have a mirror image in article 5:153 of the Code. If the board establishes that the net assets are negative or threaten to become so, or that it is no longer certain that the company can pay its debts over the next twelve months, it must convene the general meeting within two months. It presents a special report with recovery measures, or proposes dissolution.
In that situation a dividend is excluded by definition: the BV would pass neither test. What negative equity means and how you recognise it at a customer is explained in negative equity.
How to approach the test in practice
- Start from the approved annual accounts. Equity (code 10/15), formation expenses (20), current assets (29/58) and amounts payable within one year (42/48).
- Determine the unavailable equity from the articles of association. For most SME BVs that is zero.
- Calculate the net assets test: equity minus non-amortised formation and development costs minus unavailable equity. That is the ceiling.
- Draw up a twelve-month cash plan: repayments, rent, VAT, salaries, holiday pay, investments against the expected receipts. Deduct the dividend and check that money is left every month.
- Record it in a report of the board, dated before the payment, and keep it with the minutes.
Step 3 and a first version of step 4 take a minute with the distribution test tool. Your accountant refines the cash plan and writes the report. If you doubt whether a company is the right structure for you to pay out profit, read sole trader or company.
In short
- A BV may only distribute what the net assets test allows and what the liquidity of the next twelve months can bear.
- The general meeting checks the net assets, the board checks liquidity, and the latter is recorded in a report that is kept.
- An improper distribution comes back and makes the directors personally liable.
- With negative net assets or uncovered liquidity the alarm bell rings and distributing is excluded.