The beginning of 2016 is the time to address New Year’s greetings. It also marks, for companies closing their financial year on December 31st, 2015, the beginning of the process of preparation and approval of the annual accounts.

We take this opportunity to briefly recap (1) this process, (2) the recent amendments of the applicable laws in this field, and (3) the potential penalties in case of non-compliance with this process.

1. Approval and filing process of the annual accounts

The principal applicable laws on this matter are the law of 10 August 1915 on commercial companies, as amended (the “Company Law”), and the law of 19 December 2002 relating to the Trade and Companies Register and annual accounts, as amended (the “RCS Law”).

Step 1: Preparation of the annual accounts

  • The management body of the company first has to prepare the annual accounts, and to liaise with its accountant (if any) in this respect.

Step 2: Preparation of the management report

  • The management report (through which the directors have to explain and present the prepared annual accounts) is (in principle) required only for companies which fulfil at least two of the three following thresholds in two consecutive financial years (the “Thresholds”):
    • Total balance sheet of EUR 4.4M;
    • Total turnover of EUR 8.8M;
    • Average number of 50 full-time employees.
  • A SOPARFI company (i.e. having a pure holding activity) is thus generally not required to produce such a management report.

Step 3: Supervision of the annual accounts

  • The qualification of the individual person or entity in charge of the control of the annual accounts may vary from one company to another:
    • The appointment of a statutory auditor (commissaire(s) aux comptes) in a public limited liability company (société anonyme, “S.A.”), or of a supervisory board (conseil de surveillance) in a partnership limited by shares (société en commandite par actions “S.C.A.”) is in principle mandatory, but not (some exceptions exist) in a private limited liablity company (société à responsabilité limitée);
    • A Luxembourg company may have to appoint an independent expert auditor (réviseur d’entreprises agréé, “RE”). It is the case when it fulfils the Thresholds. The requirement of a statutory auditor (or supervisory board) is then no longer needed. The RE may also be appointed on a voluntary basis;
    • Specific conditions of professional qualification, honourability and the registration with the CSSF (Commission de Surveillance du Secteur Financier) must be fulfilled to obtain the title of RE, while no specific qualifications are required in order to be appointed as a statutory auditor or a member of a supervisory board. Unlike the RE, the statutory auditor and the supervisory board are corporate bodies of the companies.
  • After having communicated its/his conclusions to the management body, the statutory auditor or the RE has to prepare a specific report, following the performance of its/his duties of control of the accounts. The report has to be made available to the shareholders (please see below).

Step 4: Relevant documentation to be made available to the shareholders

  • The draft annual accounts and related documentation (including the statutory auditor’s or the RE’s report) have to be made available to the shareholders at the registered office of the company for a period of at least 15 days before the annual general meeting of the shareholders on the annual accounts (the “AGM”).
  • Upon request, the shareholders may receive copies of these documents.

Step 5: Convening and holding of the annual meeting of the shareholders

  • The management body then has to convene the shareholders to the AGM.
  • The AGM has to be held within a six month period following the end of the company’s financial year.
  • The AGM has generally to make a decision on the following matters:
    • Approval of the accounts;
    • Decision of allocation of the results;
    • Granting of a discharge for their duties during the financial year to the members of (i) the management body and (ii) the statutory auditor (if any).
  • The decision of the AGM is in principle approved at a simple majority.

Step 6: Filing

  • Once the annual accounts are approved, the management body has to proceed to the filing within a month following the date of the AGM. It consists in:
    • Filing the approved accounts with the Trade and Companies Register (the “RCS”);
    • Publishing by extract the decision of approval to the Luxembourg official gazette (Mémorial C).

Points requiring specific attention

  • The distribution of dividends is not possible when the net assets of the company would become, following such distribution, lower than the amount of the subscribed share capital plus non distributable reserves.
  • Specific rules are applicable in case where a S.A. (or S.C.A.) would suffer losses exceeding 50 % of its share capital. Directors must then insert an item in the agenda of the meeting of the shareholders, in order for them to decide on the continuation or winding-up of the company, in the presence of at least 50 % of the share capital, by a two third majority vote. In case of losses exceeding 75 % of the share capital, the same rules shall be observed except that the decision to wind-up the company may be approved by only one fourth of the voting cast. Directors may be declared personally and jointly liable toward the company if they do not comply with the above provisions.
  • A company is required to prepare consolidated annual accounts (and related consolidated management report) if it (i) has a majority of the shareholders’ or members voting rights in another undertaking, (ii) has the right to appoint or remove a majority of the members of the management body of this undertaking; or (iii) is a shareholder of this undertaking which controls alone a majority of its shareholders’ rights. The scope of requirement of consolidated accounts has been recently amended (please see below).

2. Recent update of the provisions applicable to the annual and consolidated accounts

  • The new law of 18 December 2015 on annual accounts and consolidated accounts (the “Accounting Law”) transposes the provisions of the accounting directive 2013/34/EU.
  • It is applicable since 1st January 2016 and only impacts the preparation of the accounts of financial years starting on or after this date.
  • It fully restates the applicable rules to annual and consolidated accounts, including the structure and contents of the balance sheet, profit and losses accounts and notes to the accounts, for the purpose of harmonization in the EU. Your accountant officer or RE will have to advise you and to consider these amendments in the preparation of the accounting documentation of the next financial year.
  • From a legal standpoint, two aspects of the Accounting Law (among others amendments) came particularly to our attention:
    • A new obligation has been introduced for small-sized entities (i.e. companies below the Thresholds defined above) to disclose information concerning the subsidiary companies in which they hold at least 20 % of the share capital, when such participation is considered as significant (in accordance with the principle of true and fair view of the annual accounts).
    • Thresholds to differentiate middle size and large size companies have been increased which has an impact on the scope of requirement to prepare consolidated accounts. Companies below the thresholds are in principle exempted from preparing consolidated accounts. From now on, the thresholds will be as follows:
    •  Total balance sheet of EUR 20M;
    •  Total turnover of EUR 40M;
    •  Average number of 250 full-time employees.

3. Potential penalties in case of non-compliance with the approval of annual accounts process

3.1. Potential liability of the directors

  • Civil liability
    • As the obligation to approve, deposit and publish the accounts on time is provided by the Company Law, the failure (or the delay) of the directors to fulfil their duties in this respect is considered as a breach of law and may trigger their civil liability;
    • The directors are in principle jointly and severally liable for such a breach, towards both the company (represented by the meeting of the shareholders deciding at a simple majority) and any third parties having suffered a prejudice.
  • Criminal liability
    • In addition to civil liability, failure by the directors to submit the accounts for approval within the six month period carries a potential fine penalty (payable by each of the directors);
    • A potential fine as well as a prison sentence may also be incurred if the directors fail, with fraudulent intent, to publish the annual or consolidated accounts (or other related documents).

3.2. Potential judicial dissolution of the company

  • The Luxembourg Public Prosecutor is entitled to introduce a dissolution proceeding against a company which fails to approve or file its annual accounts on time, since such failure is considered as a serious breach of law.
  • Proceedings of judicial dissolution generally concern companies which have not approved nor filed their annual accounts on several financial years.

Point requiring specific attention

After the introduction of the petition by the Public Prosecutor, the possibility to avoid the judicial dissolution shall be discussed before the Court (even if in the meantime the company has regularized its situation and has approved and filed all its annual accounts).