The Alarm Bell procedure under Belgian Company Law: Supreme Court clarifies annual repetition requirement for the public limited liability company (NV/SA)

Before addressing the judgment itself, we briefly set out below what the alarm bell procedure entails and how it must be applied in the two main categories of companies under Belgian company law.

1.1 NV/SA

In the NV/SA, the alarm bell procedure operates as follows (Art. 7:228 of the BCCA):

• the procedure must be applied from the moment where the net assets, calculated as the total amount of assets less provisions, debts and - save in exceptional cases to be disclosed and justified in the notes to the accounts - the unamortised formation and expansion costs and research and development costs, fall below half of the share capital;
• the management body is required to convene the general meeting within two months of the trigger being noticed; importantly. This obligation is not limited to the annual preparation of the yearly annual accounts, but arises at any time the management body notices (or should have noticed) that the trigger has been met - for instance when preparing interim accounts;
• the management body prepares a special report for the general meeting, proposing measures to safeguard the company's continuity;
• the general meeting decides whether to dissolve the company or to adopt the proposed measures.

The law explicitly addresses what happens when the alarm bell is first triggered, but it remains silent on what follows if the company stays below that first threshold in subsequent financial year(s). It only expressly requires the procedure to be repeated once net assets fall below a second, lower threshold, namely a quarter of the share capital. This left genuine uncertainty for companies stuck between the two thresholds for a second consecutive year, prompting directors generally to repeat the procedure out of caution.

This is where the Supreme Court judgment brings clarification. For an NV/SA, it has expressly stated that repeating the alarm bell procedure is not mandatory for as long as the company's net assets remain between the two thresholds, regardless of whether its situation stays flat, or even worsens, as long as it has not fallen below the second, lower threshold. Although the judgment concerns the alarm bell procedure under Article 633 of the old Companies Code (W.Venn), in our view it also applies mutatis mutandis to relevant provisions of the BCCA since the wording is substantively identical.

In this judgment, a company first triggered the alarm bell procedure in 2012, which the directors duly applied, deciding to continue operations. After two further loss-making years, the company went bankrupt. The trustee in bankruptcy held the directors liable for not having reapplied the procedure in the following years despite the company's continued poor financial situation. The first-instance court partially agreed, and the court of appeal upheld liability on that basis. The Supreme Court, however, overturned that decision: “the managing body does not need to repeat the alarm bell procedure every year, as long as the general meeting was properly convened at the time and decided to continue operations”.

1.2 BV/SRL

For the BV/SRL, the alarm bell procedure follows a similar logic. With the entry into force of the BCCA in 2019 and the abolition of the capital notion for this company type, the wording of the alarm bell procedure was logically adapted, and the procedure is now triggered where either of the following conditions is met (Art. 5:153 of the BCCA):

• the procedure applies where the net assets, also calculated as the total amount of assets less provisions, debts and, save in exceptional cases to be disclosed and justified in the notes to the accounts, the unamortised formation and expansion costs and research and development costs, are negative or threaten to become negative (the net assets test); or
• it also applies where the management body establishes that the company (probably) will not be able to meet its debts over the coming twelve months (the liquidity test).

The judgment of the Supreme Court cannot simply be extended to the BV/SRL, as the wording of the relevant provision in the law already appears sufficiently clear on this point. Article 5:153, §4 BCCA expressly provides that no repetition of the procedure is required within the first twelve months following the initial alarm bell procedure. From this provision it can be inferred, a contrario, that an obligation to repeat the procedure annually does in fact arise thereafter.

First and foremost, this judgment is good news: it brings welcome clarity on a question that has long kept the practice guessing. That said, the key message to clients remains unchanged: directors should keep a daily finger on the pulse of their company's (or group's) financial situation. Prudence and diligence are not a once-a-year exercise, but a constant discipline.

Second, the law still requires the alarm bell procedure to be triggered every time its conditions are met, so a recovery followed by a relapse means starting the process again. Against that backdrop, it may well be possible that managing bodies will continue reapplying the procedure periodically as a matter of caution, even where not strictly required.

Finally, it is worth adding that the alarm bell procedure is not purely an internal affair: its application is reflected in the annual report, which forms part of the publicly filed annual accounts, making it a matter of public record for companies that need to file their annual reports. This naturally matters for how a company is perceived by the outside world, including creditors, investors and business partners.