Analysis under annual accounts law of the alarm bell procedure under the CSA
January 2022 – On 12 October 2021, the Accounting Standards Committee (AcSB) published an opinion on the alarm bell procedure under the Companies and Associations Code (CSA). The application of the alarm bell procedure depends to a large extent on the valuation rules applied by the board of directors. Directors who apply the rules correctly escape any special liability they may incur.
Alarm bell procedure and net assets
When the net assets of a company fall below certain thresholds, the administrative body must convene the general meeting of the company and make proposals to ensure, as far as possible, the continuity of the company. The general meeting can then decide what to do with these proposals.
The concept of net assets also arises in connection with a dividend distribution. The net assets of the company may not become negative as a result of the distribution of dividends.
These rules already existed under the old Companies Code, but the definition of net assets was different there depending on whether it was a question of the alarm bell procedure or a dividend distribution. Under the old Companies Code, net assets were equal to :
in the case of the alarm bell procedure, the total assets less provisions and debts ;
in the context of the dividend distribution, the total assets less provisions and debts, as well as the amount not yet amortised of establishment and expansion costs and - with some exceptions - the amount not yet amortised of research and development costs.
Under the CSA, only one definition remains: net assets are equal to :
total assets less provisions, debts and, "except in exceptional cases to be mentioned and justified in the notes to the annual accounts", the unamortised amounts of formation and expansion costs and research and development costs.
The new definition therefore corresponds to the "old" definition for dividend distributions.
Note that the CNC does not specify in which exceptional cases R&D costs should not be deducted.
Thresholds for activation of the alarm bell procedure in the SA
The alarm bell procedure is activated when, as a result of a loss, the company's net assets are reduced to :
to less than half the capital; or
to less than a quarter of the capital. In this case, the decision to dissolve the company can even be taken with one quarter of the votes.
Finally, any interested party or the public prosecutor can ask the court to dissolve the company if the net assets are reduced to less than 61 500 euros.
By capital of a public limited company, the CNC means the "subscribed capital", which corresponds to the liability item I.A.1 of the balance sheet.
Thresholds for the activation of the alarm bell procedure in the SRL and SC
In so-called non-capital companies, the alarm bell procedure must be activated :
when the net assets of the company are in danger of becoming or have become negative. It is important to note that in this case, it does not necessarily have to be a "loss" in order to establish a decrease in net assets;
when the administrative body finds that it is no longer certain that the company, according to reasonably expected developments, will be able to pay its debts as they fall due for at least the next twelve months.
Attention: the alarm bell procedure is mandatory. The company's articles of association may derogate from this legal procedure by imposing stricter provisions, but not more flexible rules!
Role of the administrative body and timing
If the board of directors finds that the net assets have either fallen below the subscribed capital or are in danger of becoming negative, it must activate the alarm procedure. Both the determination of the thresholds and the timing of their crossing are therefore crucial.
In this respect, the CNC states that, in its view, the board of directors must check whether the application of the alarm bell procedure has been complied with whenever a legal or statutory provision prescribes an assessment of the company's financial situation. This is obviously the case when the annual accounts are drawn up. But it can also be the case when preparing a draft annual account, a half-yearly account to be submitted to the auditor, a quarterly account to be submitted to the works council, an (interim) account summarising the assets and liabilities to be submitted in connection with other transactions, etc. The articles of association may impose stricter rules.
The administrative body is also obliged to carry out "permanent and timely" deliberations when serious and concordant facts occur that may jeopardise the continuity of the company.
Continuity valuation rules
The preparation of the annual accounts, which is the responsibility of the administrative body, involves a choice of valuation rules to be applied. These valuation rules obviously have an important influence on the determination of the net assets. The CNC prescribes that they should be chosen with a view to the company's continuity. The documents for checking whether the thresholds are exceeded in the context of the alarm bell procedure must in principle be drawn up on a going concern basis.
In principle, these valuation rules must be identical from year to year. However, the board of directors may not ignore any significant changes in the company's activities when preparing the annual accounts. If these changes jeopardise the true and fair view of the company's assets, liabilities, financial position and results, the valuation rules previously followed must be adapted.
Discontinuity
If the board of directors is of the opinion that the going concern perspective of the company can no longer be maintained, the valuation rules must be adapted to a discontinuity perspective. This implies that :
Formation expenses must be fully depreciated;
fixed assets and current assets must also, where appropriate, be subject to additional depreciation or write-downs to reduce their book value to their probable realisable value;
provisions must be made to cover the costs inherent in the cessation of activities, in particular the cost of compensation to be paid to staff.
Belgian accounting regulations do not contain any provisions concerning the time period to be respected for the assessment of the going concern assumption. The CNC considers that the assessment of the going concern assumption by the board of directors should reasonably be made within a period of at least twelve months from the balance sheet date.
