Introduction
Procedure
Recovery measures
Directors' liability
Article 633 of the Companies Code lays down a procedure that must be followed when a company's net assets fall below one-half or one-quarter of its share capital due to losses sustained. This is known as the 'alarm bell procedure' and is particularly relevant in times of economic downturn.
This update addresses the procedure as it applies to a Belgian company limited by shares or a Belgian partnership limited by shares. A similar regime applies to private limited liability companies and cooperative limited liability companies. Company directors in particular should be aware of the procedure and possible recovery measures, as well as the penalties for directors who fail to comply with the procedure.
Procedure
The alarm bell procedure must be followed when a company's net assets fall below one-half of the amount of its share capital due to losses sustained, and again when such assets fall below one-quarter of the share capital.
The board of directors must convene a general shareholders' meeting within two months of the date on which the losses are identified by the board or should have been identified pursuant to applicable legislation or the company's articles of association. The board must verify the company's net asset position as soon as a loss is identified and each time that it is required to compile a financial statement of the company (either under applicable legislation or by the articles of association) - for example, when drawing up the annual accounts or the financial statement that must be sent to the statutory auditor every six months, or following a transaction wherein a statement of assets and liabilities is required.
A general shareholders' meeting must be convened to discuss and vote on the dissolution of the company or the recovery measures proposed by the board. Dissolution requires the approval of a 75% majority of those voting at the general meeting, provided that the shareholders present or represented at the meeting constitute at least 50% of the company's share capital. If this quorum is not reached at the first meeting, a second meeting can be called, which may validly resolve on the dissolution of the company, regardless of the number of shareholders present or represented.
The board must compile a special report, to be submitted to the general shareholders' meeting, in which it proposes the dissolution of the company; if the board does not propose dissolution, it must set out measures to redress the company's financial position.
This procedure must be repeated if the company's net assets fall below one-quarter of the company's share capital. However, in this case, the dissolution of the company requires only 25% approval, provided that the shareholders present or represented at the meeting constitute at least 50% of the company's share capital.
Article 633 does not impose a recurrent obligation on the board to follow the procedure as long as the company's net assets remain below the threshold. It is generally accepted that the board of directors is required only to convene a general shareholders' meeting when the company's net assets fall below one-half of the share capital and again if they fall below one-quarter of the share capital. However, if the alarm bell procedure has been followed, the company's financial situation has improved and its net assets have risen above either of the relevant thresholds, only to fall below one of the thresholds again, it is advisable to reapply the alarm bell procedure.
Recovery measures
Article 633 does not elaborate on the nature or scope of the recovery measures that the board of directors must propose, other than providing that if it does not propose dissolution, it must advance measures that it considers will redress the company's financial situation. Article 633 does not require the recovery measures to have an immediate effect on the company's net asset position; however, they must aim to prevent further losses and to redress the company's net asset position. The proposed measures must also be realistic; the directors can be held liable for unrealistic recovery measures for failure to perform their duties. Common recovery measures include capital reductions by incorporation of losses or capital increases, the implementation of cost reduction plans and the renegotiation of credit facilities. If the board believes that the company's position is temporary and likely to improve, it has the option of describing these improving prospects and justifying its view that recovery measures are not required - for example, because an increase in turnover is expected as a result of improving market conditions.
Directors' liability
Article 633 requires the board to:
- convene a general shareholders' meeting to discuss and vote on the dissolution of the company or proposed recovery measures; and
- prepare a special report in which it proposes either to wind up the company or to implement recovery measures.
Non-compliance with these obligations constitutes a breach of the Companies Code. Article 528 thereof makes the directors jointly liable to the company and to third parties for damages resulting from such breaches. Moreover, Article 633 specifies that if the directors fail to comply with the alarm bell procedure, damages suffered by third parties are presumed to have been caused by this breach of Article 633; non-compliance thus reverses the burden of proof.
Article 527 of the Companies Code makes the directors liable to the company for failure to perform their duties, including the general duty of due care. This general duty of due care is generally interpreted as what a reasonably cautious and diligent director would have done in the specific circumstances. Therefore, it is advisable for the board of directors to meet in order to discuss and follow up on the company's net asset position and the recovery measures once the alarm bell procedure has been followed.
Furthermore, if the company's situation deteriorates and it fulfils the conditions for bankruptcy, the company must file for bankruptcy within one month of the suspension of payments. Individual directors can be held liable for losses resulting from the continuation of the company's activities when it should have been obvious to a diligent and reasonable director that there was no chance of recovery. The directors, former directors and de facto directors of a bankrupt company can be held liable for all or part of the company's net liabilities if it is established that they committed a clear gross fault that contributed to the bankruptcy.
If a company's net assets fall below the legally imposed minimum share capital (ie, €61,500 for a limited liability company), an interested third party (eg, a creditor or a competitor) may ask the commercial court to order the dissolution of the company even if the alarm bell procedure has been followed. However, the court may grant the company period in which to redress its position.
For further information on this topic please contact Tom Vantroyen or Kathelijne Beckers at Altius by telephone (+32 2 426 14 14), fax (+32 2 426 20 30) or email ([email protected] or [email protected]).