Analysis of the alarm bell procedure from an annual accounts perspective under
On 12 October 2021, the Accounting Standards Commission (ASC) published an
advice on the alarm bell procedure under the Companies and Associaties Code
(CAC). The application of the alarm bell procedure depends to a large degree on
the valuation rules applied by the management body. Directors applying these
rules correctly can avoid the special liability which might apply.
Alarm bell procedure and net assets
When a companys net assets decrease under certain thresholds, the management
body should convene the companys general shareholders meeting and management
should propose measures to assure the companys continuity. The general meeting
can then decide what it will do with these proposed measures.
The term net assets is also used when dividends are concerned. The net assets
of a company cannot become negative due to the distribution of dividends.
These rules already existed under the previous Company Code, but the definition
of net assets was different depending on whether is concerned the alarm bell
procedure or the distribution of dividends. Under the old legislation net
for the alarm bell procedure equal to total assets less provisions and debts.
for the distribution of dividends equal to total assets less provisions, debts,
non-depreciated goodwill and formation expenses, and with certain exceptions
the non-depreciated amounts of research and development.
Under the CAC only one definition remains: the net assets:
equals the total assets less provisions, debts and with certain exceptions to
be noted and motivated in the explanatory notes with the annual accounts the
non-depreciated amount of goodwill, formation expenses and the amounts of
research and development.
The new definition is therefore the same as the old definition for dividend
Note that the ASC does not mention in which exceptional circumstances the
R&D costs should not be deducted.
Alarm bell procedure thresholds in the NV
The alarm bell rings when, as due to losses of the company, its net assets
below half of the capital, or
below one fourth of the capital. In this case the dissolution of the company can
be decided with one fourth of the votes.
Finally, every stakeholder or the public prosecution office can demand the
dissolution before court in case the net assets have decreased below the
threshold of 61.500€.
The ASC defines capital for an NV as the subscribed capital, which equals
liability post I.A.1 on the balance sheet.
Alarm bell procedure thresholds in the BV and the CV
For the companies without capital, the alarm bell procedure should be applied
the net assets of the company threaten to become negative or became negative.
Note that there should be no suffered losses to determine the decrease of the
the management body assesses that it is no longer sure that the company,
according to the reasonably to be expected developments, during the next twelve
months will be able to pay its debts, as they become due.
Watch out: the alarm bell procedure is compulsory law. The companys articles of
association can proscribe stricter rules, but not easier ones!
Role of the management body and timing
The management body which assesses that the net assets are below the subscribed
capital or threatens to become negative, should start the alarm bell procedure.
Both assessing the threshold and the timing of the exceeding are crucial.
The ASC indicates that the management body is obliged to check whether the
application conditions for the alarm bell procedure are fulfilled each time a
legal or statutory provisions states that the financial condition of the company
should be charted. Surely this is the case for the annual accounts. But it can
also be the case when drafting provisional annual accounts, half-yearly
accounting statements which should be communicated to the statutory auditor, a
quarterly statement for the works council, a (intermediate) statement of assets
and liabilities for other transactions, .. The articles of association can
provide for stricter rules.
Besides, the management body is obliged to continuously and timely confer each
time important and corresponding facts arise which can jeopardise the continuity
of the company.
Valuation rules in going concern
When drafting the annual accounts, the management body chooses the applicable
valuation rules. These valuation rules have an important impact on the
determination of the net assets. The ASC prescribes that the valuation should be
that the company will continue its activity. The statements on the basis of
which in the context of the alarm bell procedure it should be determined
whether or not threshold are exceeded, should in principle be drafted in going
As a general rule, the valuation rules cannot be changed from one accounting
year to another. But the management body can, when drafting the annual accounts,
not neglect important changes in the activity of the company. In the event that
the actual valuation rules no longer give a true and fair view on the capital,
the financial position and the result of the company, they should be contested.
If the management body assesses that the company cannot longer be continued, the
valuation rules should be modified to a situation of discontinuity. This means
the formation costs should be fully depreciated;
for the fixed and current assets, if necessary, additional depreciations or
devaluations should be registered in order to reduce the book value to the
expected realisation value;
a provision should be made for expenses related to the end of the activities,
especially for the allowances to be paid to the personnel.
The Belgian accounting regulations contain no provisions on the timing for
determining the continuity assumption. The ASC considers that reasonably the
management body should assess the continuity of the company over a period of at
least twelve months, counting as from the closing date of the accounting