What, exactly, are net assets?
‘Alarm bell’ procedures in critical situations
Christèle Parmentier, Partner BDO Accountancy
A company’s board of directors is responsible for its financial situation. Among other things, this means that, should there be a critical decrease in the company’s net assets, the board must follow an ‘alarm bell’ procedure. But what, exactly, is meant by net assets? The Belgian Accounting Standards Commission (CNC-CBN) provides clarity in its opinion.
“A Board of Directors that convenes the general meeting too late can be liable for damage to third parties.”
In the event of a critical decrease in a company’s net assets (NA), the directors must convene a General Meeting (GM) within 2 months – and they must decide on the continuation of the company.
In its opinion, the Commission defines the concept of net assets under the Companies and Associations Code (CAC) for companies both with and without issued capital. Net assets correspond to the total amount of assets from which the accounting provisions, debts and net value of start-up expenses, expansion expenses and research and development expenses are deducted. In certain exceptional cases, you cannot deduct all of these expenses. However, this exception must be justified in the notes to the annual accounts. According to the new CAC, a distinction can no longer be made between the net assets used ‘for payment’ and the net assets used in the context of the ‘alarm bell’ procedure (which used to be the case).
Companies with issued capital
The critical threshold is determined by comparing the amount of the net assets after the loss of the issued capital with the liabilities of the balance sheet. The following table summarises the different thresholds of the CAC:
|Companies with issued capital
|NA < 50% of the capital
||NA < 25% of the capital
||NA < the capital
|Art. 7(228) para. 1 CAC
||Art. 7(228) para. 4 CAC
||Art. 7(229) CAC
|The Board of Directors must convene the GM within 2 months to decide on the continuation of the company; the body draws up a special report on the measures it proposes in the event of continuation.
||The Board of Directors must convene the GM within 2 months to decide on the continuation of the company; the body draws up a special report on the measures it proposes in the event of continuation.
||Any interested party, or the Public Prosecutor, may request the company’s dissolution in court.
|The GM must decide using the attendance and voting quorum in matters of amendments to the Articles of Association (Article 7(153) of the CAC).
||The GM may approve a dissolution with only 1/4 of the votes cast (without taking into account any abstentions in the numerator or denominator).
||Any court ruling on the dissolution may grant a period of time to regularise the situation.
|These rules apply subject to stricter provisions in the Articles of Association.
Companies without issued capital
A Board of Directors that determines that (unless stricter rules were agreed to in the Articles of Association):
- the net assets are negative;
- the net assets are at risk of becoming negative;
- it is no longer certain that the company will be able to pay its debts for at least 12 months;
must convene the general meeting within 2 months to decide on the continuation of the company.
Just as for companies with issued capital, the Board of Directors will have to draw up a special report in which it explains the measures to be taken to ensure the continuation of the company. Boards of Directors that have followed this procedure are no longer obliged to convene a general meeting for the same reasons within 12 months of convening the original meeting.
Board of Directors’ liability
The CAC stipulates that the general meeting must be convened within 2 months of the date on which the critical situation was identified, or should have been identified, under legal or statutory provisions. If the accounts prepared in accordance with the Articles of Association are drawn up late, and the ‘alarm bell’ procedure should have been applied much earlier, then, unless proven otherwise, it is presumed that any damage suffered by third parties is the result of the late convening of the general meeting – and the Board of Directors can be held liable.
The new Companies and Associations Code no longer makes a distinction between the net assets used ‘for payment’ and the net assets used in the context of the ‘alarm bell’ procedure.
Continuous or discontinuous net assets?
The accounting statements must be prepared in accordance with accounting law. The Belgian Accounting Standards Commission deems that the introduction of the ‘alarm bell’ procedure is not a sufficient or necessary reason to adopt a discontinuation perspective.
However, if the management body is of the opinion that the prospects for continuing the business activity cannot be maintained, the valuation rules must be adjusted and the accounting statement must take into account the elements laid out in Article 3(6), § 2 RD/CAC, which states that:
“a) start-up expenses must be written off in full;
b) in the case of fixed and current assets, additional depreciations or write-downs must be applied, if necessary, in order to reduce the book value to the probable realisation value;
c) provision must be made for the costs associated with the termination of work activities, particularly for compensation to be paid to the staff.”