The alarm bell procedure: an alarm for the director too
May 2021 – When circumstances require it, the directors must convene the general meeting and confront it with the choice of stopping everything or taking measures to ensure continuity. The directors are responsible for this alarm procedure. And this is no small responsibility.
Alarm !
When should directors activate the alarm procedure? This depends on the articles of association and the type of company. The law provides for the following in this respect:
in the SA/NV, the procedure must be activated when the net assets are reduced to less than half the share capital;
in the SRL/BV or SC/CV, there are two possibilities. The procedure must be activated when the net assets are likely to become or have become negative (this is the balance sheet test). The procedure must also be activated when it is no longer certain that the company will be able to pay its debts as they fall due for at least the next twelve months (this is the liquidity test).
In both cases, the articles of association may provide for stricter conditions.
What should be done?
When the alarm sounds, the administrative body must convene the general meeting. The law does not specify exactly when this should take place, but it does stipulate that the general meeting should be held within two months of the date on which the alarm was raised.
The agenda of the meeting is also relatively simple: dissolve the company or ensure its continuity.
If the administrative body proposes to ensure continuity, the agenda must also contain proposals for measures to be taken to ensure the continuity of the company. The proposals are set out in a special report. If this special report is missing, the decision of the general meeting is void.
It should be noted that in a public limited company, when the net assets are reduced to less than a quarter of the share capital, dissolution can already be decided by a quarter of the votes cast.
When to start?
In principle, the board of directors should carry out the tests when the annual accounts are drawn up. But the alarm procedure should not only be activated when the annual accounts reveal that something is wrong. There may be other times when a reaction from the administrative body is expected: it may be enough, for example, that the execution of a contract is problematic or that a major debtor defaults, for the administrative body to take action.
Liability of the administrative body
If the administrative body does not activate the procedure (or makes mistakes so that the decision of the general meeting is null and void), the damage suffered by third parties is presumed to result from this failure to convene.
If a company goes bankrupt and it subsequently appears that the alarm procedure should have been activated, the directors may be liable for part of the remaining debts.
Hence the importance of the special report setting out the measures that should enable the company to continue as a going concern. If the report shows that the measures taken were not sufficient, the board of directors can still be held liable because the alarm procedure was not carried out properly. So it is not enough to follow the alarm procedure.
How can you escape this liability?
The liability of the administrative body for failure to convene the general meeting is subject to a limitation period of only five years. If the company eventually gets away with it without any action being taken, there may not be any financial consequences for the directors.
But if things go wrong, the directors will have to try to prove that the damage suffered by third parties was not the result of a breach of duty committed in the course of the bellwether procedure.
Debts which date from before the alarm bell procedure was activated are not attributable to a breach by the directors and therefore cannot be the subject of a claim for damages.
Directors may also seek to prove that the creditor was aware of the company's precarious position and yet continued to deal with the company.
A shareholder-director (with a majority of votes) cannot escape liability by arguing that he would have decided to sue the company anyway. The courts will in principle refute this argument.
The responsibility of the accountant
Is it the accountant's responsibility to warn the manager that the alarm bell procedure should be activated?
This question is not so easy to answer because the accountant keeps the company's accounts, not those of the manager. In other words, the accountant has a contract with the company, not with the manager, while it is the manager's responsibility to activate the alarm bell procedure, if necessary.
However, there is a view that the accountant may also have extra-contractual liability. An accountant is obviously well placed to realise that the alarm procedure should be activated. In this context, it is accepted that the general principle of diligence (the diligence that one is entitled to expect from everyone) can lead to joint liability.
In the past, accountants have been held jointly liable, but in most cases there is sufficient consultation between the accountant and the other parties involved, so that in practice the board of directors is sufficiently informed about the financial situation of its own company and cannot claim ignorance.
