What is the alarm bell procedure in companies?
The alarm bell procedure is a protective mechanism provided for in the CCA that requires directors to convene the general meeting when the company’s continued existence is financially at risk.
Its objectives are threefold:
· to inform shareholders in a timely manner
· to limit directors’ liability
· to protect creditors
The specific trigger, however, differs depending on whether the company is a public limited company (NV), a private limited company (BV) or a cooperative company (CV).
When must the alarm bell procedure be initiated?
The answer to the question “when must I sound the alarm bell and initiate this procedure?” therefore depends on the legal form of the company.
1. For a public limited company (NV)
For an NV, the traditional capital criterion still applies.
The alarm bell procedure must be initiated when:
The management body must then convene the general meeting within two months.
2. For a private limited company (BV) or cooperative company (CV) (companies without capital)
Since the introduction of the CCA, the concept of capital has been abolished within the BV and CV. A different approach therefore applies.
Unless stricter provisions are laid down in the articles of association, the alarm bell procedure is triggered when:
the net assets are negative or are at risk of becoming negative (balance sheet test), or
the management body establishes that, based on reasonably foreseeable developments, the company will not be able to pay its debts for at least the following 12 months as they fall due (liquidity test).
This means that directors of a BV or CV must monitor the situation much more actively. Not only the equity is relevant, but also the company’s future ability to meet its payment obligations.
However, this should be qualified to a certain extent as the ‘general provisions’ of the CCA contain a similar provision, namely Article 2:52 CCA, which applies to every legal form. This provision requires the board to act, meaning remedial measures must be taken to safeguard the continuity of the business for a minimum period of 12 months, whenever ‘serious and consistent facts’ may jeopardise the company’s continued existence.
3. Does the alarm bell procedure apply to a limited partnership (CommV)?
The search term alarm bell procedure limited partnership often causes confusion.
For a limited partnership (CommV), the formal alarm bell procedure applicable to NVs, BVs or CVs does not apply in the same way. This is because the general partners are jointly and severally liable without limitation for the company’s obligations.
In addition, the directors (managing partners) remain subject to general liability rules as well as to the general provision concerning ‘serious and consistent facts’ that may jeopardise the continuity of the company. If they fail to act in time in the event of financial difficulties, their liability may still be engaged.
In other words, the managers are not subject to the traditional alarm bell procedure but they do have a significant duty of care.
Who is responsible for initiating the alarm bell procedure?
The management body bears full responsibility.
In practice this means:
· actively monitoring the financial situation
· determining in a timely manner whether a statutory trigger has been reached
· convening a general meeting within two months
· preparing a special report
Failure to comply with this obligation may lead to personal liability.
Which financial signals trigger the alarm bell procedure?
For an NV:
For a (BV) or CV:
negative equity or risk of becoming negative
structural liquidity problems
impending inability to pay debts within the next 12 months
In practice this is often preceded by:
consecutive loss-making years
negative cash flow
arrears with the social security authorities or tax authorities
structurally declining equity
These triggers may also indicate the existence of ‘serious and consistent facts’ that may jeopardise the continuity of the company, even without the formal application of the alarm bell procedure. For this reason you may receive a notification from your accountant, known as a notification pursuant to Article XX.23 §3 of the CEL. Accountants are required to send such a letter as part of their statutory duty of information as professionals.
How does the alarm bell procedure work, step by step?
Step 1: determination
The management body determines that a statutory trigger has been reached
Step 2: preparation of special report
This report contains:
an analysis of the financial situation
the cause(s) of the difficulties
a proposal for dissolution or continuation
if continuation: concrete remedial measures
Step 3: general meeting
The general meeting is convened within two months.
Step 4: decision
The shareholders decide whether the company will be dissolved or continued.
Attention!
· Within an NV, dissolution may be decided by a one quarter majority of the votes cast, instead of the traditional majorities required for an amendment to the articles of association, when the net assets have fallen below one quarter of the share capital as a result of losses.
· When the net assets of an NV fall below EUR 61,500, any interested party or the public prosecutor may request the court to order the dissolution of the company. In such a case the court may grant a period for regularisation.
What must be included in the alarm bell report?
The report must at least contain:
a clear financial analysis
a justification explaining why continuation remains justified (if applicable)
concrete remedial measures
an assessment of future prospects
This document is crucial in the context of potential future liability proceedings.
What are the consequences if the alarm bell procedure is not applied (in a timely manner)?
Failure to apply the alarm bell procedure correctly may result in:
personal liability of directors
an increased risk in the event of bankruptcy, for example manifestly serious fault that contributed to the bankruptcy or so-called wrongful trading, meaning the continuation of a hopelessly loss-making activity
potential liability claims by creditors
Can the alarm bell procedure be applied more than once?
Yes. If the financial situation again falls below the statutory thresholds, the procedure must be initiated again. Each situation requires a separate assessment. In any event, periodic monitoring is advisable.
After all, compliance with the alarm bell procedure offers no guarantees. The financial situation may deteriorate to such an extent that there is a definitive cessation of payments. In that case there are no real prospects of recovery and a declaration of bankruptcy must be filed with the registry of the Insolvency Court within one month after the company has ceased to make payments.
What is the difference between the alarm bell procedure and judicial reorganisation?
The alarm bell procedure is an internal company law obligation. Judicial reorganisation is a procedure before the enterprise court that provides protection against creditors.
In other words, the alarm bell procedure is an early warning mechanism rather than a(n) (insolvency) procedure that is initiated externally, with temporary protection from creditors.
What does a concrete example of the alarm bell procedure look like?
Example:
An NV has a share capital of EUR 300,000.
After several loss-making years, the net assets amount to EUR 130,000.
This is less than half of the share capital.
As a result, the alarm bell procedure must be initiated.
If the net assets were to drop to EUR 60,000, which is less than one quarter of the share capital, dissolution could be decided with a one quarter majority of the votes cast, instead of the traditional majority required for an amendment to the articles of association. In theory any interested party or the public prosecutor could also request the court to order the dissolution of the company because the capital has fallen below the minimum threshold of EUR 61,500.
Example BV
A BV has no share capital, the capital concept has been replaced by contributions.
The equity is negative and the cash flow forecast shows that in eight months’ time, the company will no longer be able to pay its debts.
Both the balance sheet test and the liquidity test are negative.
The management body must initiate the alarm bell procedure.
What is the role of the general meeting?
The general meeting:
takes note of the special report
discusses the proposed measures
decides on dissolution or continuation
How can you assist me with the alarm bell procedure?
Our accountants and experts play a key role in:
monitoring equity
carrying out balance sheet and liquidity tests
preparing interim financial statements
assisting with the preparation of the special report
supporting the convening and organisation of the general meeting
advising on remedial measures and the preparation of a recovery plan
A timely analysis significantly reduces the risk of liability. Would you like us to assist you? Do not hesitate to contact us.
