What model must be employed for annual accounts?
The CCA distinguishes between companies with capital, such as public limited liability companies (SA/NV), European companies (SE) and European cooperative companies (SCE), and companies without capital, such as private companies (SRL/BV) and cooperative companies (SC/CV). This amendment affects both the MAR (Minimum Chart of Accounts) and the annual accounts. There are six different models for annual accounts: three for shareholding companies (micro, abbreviated and full), and three for non-shareholding companies (micro, abbreviated and full).
What about own equity?
The changes to the MAR affect non-shareholding companies at the own equity level. Account 11, ‘Contributions excluding capital’, is now subdivided into 110 ‘Available contributions excluding capital’ and 111 ‘Unavailable contributions excluding capital’. When the CCA went into effect on 1 January 2020, the fully paid-up portion of the (fixed) capital and the legal reserves of existing SP(RL)s/BV(BA)s and SC(RL)s/CV(BA)s were converted, ipso jure and without fulfilment of any formality, into a statutory unavailable shareholders’ equity account.
What changes must affected companies implement?
S(P)RLs/BV(BA)s and SC(RL)s/CV(BA)s have become capital-free and must adapt their articles of association and accounts in accordance with the table below. However, they can also amend their articles of association in order to make the unavailable accounts available again.
|Conversion of capital
|100 Issued capital
|111901 Uncalled other unavailable contributions excluding capital
|@ 1119 Other unavailable contributions excluding capital
|101 Uncalled capital
|Conversion of legal reserves
|130 Legal reserves
|@ 1311 Statutory unavailable reserves
What are the new rules for payments in SRLs/BVs and SCs/CVs?
With the abolition of the concept of capital for SRLs/BVs and SCs/CVs, the rules for payments have also changed. Though profit allocation is still decided by the General Meeting, this may now only be implemented once the management body has issued a decision as well. In addition, ‘payment’ as a concept has received a broader meaning for these two capital-free legal entities. With the formal abolition of the capital requirement, the procedure for capital reductions disappears, and the rules for payments now also cover repayments of previous contributions to shareholders in cash or in kind.
The basic reasoning is that payments may not result in the company’s own equity becoming negative or the company no longer being able to pay its outstanding debts. These two starting points translate into a dual solvency test, namely the net assets test and the liquidity test.
What are the new rules for payments by SAs/NVs?
In contrast to SRLs/BVs and SCs/CVs, the rules for payments by SAs/NVs remain largely unchanged. Article 617 of the Companies Code, which covers the net assets test, is substantially the same. As the liquidity test is intended as compensation for the abolition of capital and SAs/NVs retain the capital concept, the only solvency test for SAs/NVs is the net assets test. Moreover, the concept of payments is interpreted less broadly for SAs/NVs – and therefore, the formal procedure for capital reductions remains in place.
What are net assets?
Net assets are the total amount of assets, less provisions, debts and, barring exceptional cases, not yet depreciated amounts for formation and expansion, and research and development costs. Those undepreciated amounts may not be included, as they are essentially fictitious assets. The costs are after all capitalised with the aim of spreading the burden over multiple financial years.
In very exceptional cases, those capitalised costs may nevertheless be included, on the condition that this is justified in the explanatory notes to the annual accounts. Actually, since the Royal Decree of 18 December 2015, capitalisation of research costs is no longer permitted. We still bring them up, though, as companies may still have access to previously capitalised research costs.
How are net assets calculated?
Net assets must be calculated in the same way for all payment cases, without distinction between dividends, bonuses or other equivalent transactions such as purchases of own shares or financial support.
Net assets must be calculated on the basis of the most recently approved annual accounts. For SRLs/BVs and SCs/CVs, this valuation may also be based on a more recent statement of assets and liabilities. If so, for companies with a statutory auditor, the auditor must check the figures in the statement. The statement must be a recent one, with figures that are current.
How does the net assets test work?
In principle, for SRLs/BVs, SCs/CVs and SAs/NVs, the General Meeting is still authorised to determine the amount of the payments, usually on the initiative of the management body. However, the General Meeting’s decision to pay out can only take place after completing the net assets test, also known as the balance sheet test. This test examines whether the company’s net assets after payment will remain positive and not drop below the legally imposed threshold.
If the net assets are negative, or risk becoming so due to the payment, the General Meeting cannot decide to make the payment. If the company has shareholders’ equity that is unavailable by law (such as an unavailable reserve in case of purchase of own shares) or according to the articles of association, the net assets are not even allowed to drop below the amount of the unavailable shareholders’ equity. Here the law clarifies that the unamortised portion of revaluation gains must be regarded as unavailable. This prevents value increases – based purely on expectations and not yet tested through actual market-based transactions – from being considered profit.
The net assets test for SAs/NVs differs from the tests for SRLs/BVs and SCs/CVs in one respect: namely, the minimum threshold for the net assets. This is because, for SAs/NVs, the minimum threshold for the net assets is increased by the capital.
What is the liquidity test?
In addition to the net assets test, SRLs/BVs and SCs/CVs must also perform a liquidity test. If the General Meeting decides to make a payment, the management body must determine whether the company will still be able to pay any debts that fall due for a period of at least 12 months after making the proposed payment. Only when the liquidity test shows a positive outcome may the management body actually make this payment.
What must be considered when applying a liquidity test?
The liquidity test also aims to account for future developments that are not yet included in the balance sheet as such. In principle, applying the liquidity test always requires a ‘practical’ assessment that takes various circumstances and developments into account. Therefore, the liquidity test will not stop payments from being financed through debts or an awarded dividend from being booked to the current account.
If the management body is unaware of any special circumstances that would affect the liquidity position in the reasonably foreseeable future, it may base the test on the balance sheet and a projection of capital flows for the next 12 to 24 months. However, if there are in fact particular circumstances, the management body must make an additional effort (for example, by using detailed capital flow tables).
What about the liquidity test results?
The CCA mandates that the management body must report the liquidity test results and the data on which these are based. However, this report is not subject to any formal requirements, nor need it be published. Notably, it is not even prescribed under penalty of nullity.
SRLs/BVs and SCs/CVs with a statutory auditor must have their auditor check the report. The statutory auditor cannot replace the administrative body in this respect. His or her role is limited exclusively to checking the accounting and financial data on which the management body based its decision.
Are there sanctions for unlawful payments?
Unlawful payments are sanctioned through the (joint and several) liability of the directors in accordance with the general rules for directors’ liability.
With a view to protecting creditors, the CCA also stipulates that if a payment was made in violation of the net assets and/or liquidity test, the company may recover this unlawful payment from the shareholders. In accordance with the EU Capital Directive, for SAs/NVs, unlawful payments may be recovered from shareholders if they were aware of an irregularity or should have been, considering the circumstances. Recovery is possible for SRLs/BVs and SCs/CVs, regardless of whether the relevant shareholder was aware of the unlawful nature of the payment.
In addition, for SRLs/BVs and SCs/CVs, the CCA provides for the specific joint and several liability of the members of the management body for any damage pursuant to payments for which the management body was, or should have been, aware that the company would consequently soon no longer be able to pay its debts as they fell due. To determine liability, it must be possible to demonstrate an error on the part of the director(s) in the performance of the liquidity test. The mere fact of the company going bankrupt shortly after a payment is insufficient. A judge can decide that a director is liable for damage pursuant to unlawful payment only when it is established that the director’s actions clearly diverged from the approach of a normally careful and conscientious director in the same circumstances.
Finally, directors risk criminal penalties for payments made in violation of the net assets test or failure to perform the liquidity test. Directors may be subject to a monetary fine of between €50 and €10,000 and a prison sentence of one month to a year.