Negative equity: what the law says

What it means

Equity (10/15) is the difference between what the company owns and what it owes. If it is negative, accumulated losses have absorbed everything the shareholders had contributed, and more: even by selling all its assets at book value, the company could not repay all its debts.

Net assets according to the law

The Code of Companies and Associations does not reason on the equity of the balance sheet but on net assets. The Commission for Accounting Standards (opinion 2021/14) recalls its definition: total assets, less provisions, debts and, except in exceptional cases to be justified in the notes, formation expenses and research and development costs not yet amortised.

The nuance matters: a company showing EUR 20,000 of equity but carrying EUR 50,000 of capitalised development costs has, within the meaning of the law, negative net assets.

The alarm bell in the BV/SRL

Article 5:153 of the CCA provides two tests, each sufficient to trigger the procedure:

1. The net assets test: net assets risk becoming or have become negative.
2. The liquidity test: the management body observes that it is no longer certain that the company, according to developments that can reasonably be expected, will be able to pay its debts as they fall due for at least the next twelve months.

The second test is specific to the BV/SRL, which no longer has a minimum capital since the CCA: the law replaces capital protection with a watch on the capacity to pay.

In both cases, the management body must, unless the articles of association are stricter, convene the general meeting within two months from the date on which the situation was observed or should have been observed, so that it decides on dissolution or on the measures announced in the agenda to ensure continuity.

The alarm bell in the NV/SA

The public limited company has kept a capital; the thresholds refer to it.

• Article 7:228, paragraph 1: when, as a result of losses, net assets are reduced to an amount below half of the capital, the meeting must be convened within two months to deliberate on dissolution or on recovery measures.
• Article 7:228, paragraph 4: when net assets are reduced to an amount below a quarter of the capital, dissolution may be decided by a quarter of the votes cast at the meeting.
• Article 7:229: when net assets are reduced to an amount below EUR 61,500, any interested party or the public prosecutor may ask the court to dissolve the company.

The special report and the sources of information

The management body presents the meeting with a special report setting out the situation and proposing either dissolution or recovery measures. CBN opinion 2021/14 specifies on which documents it can observe the situation: the annual accounts drawn up or in draft, the half-yearly statements sent to the statutory auditor, the quarterly statements for the works council, and the interim statements drawn up for a distribution or a capital transaction. The body must check the thresholds every time a financial assessment is legally or statutorily required, and the documents used are normally prepared on a going concern basis, unless the body proposes dissolution.

The consequences for directors, and for you

Directors who do not comply with the procedure are liable towards third parties. Two other rules work in favour of creditors:

• article 3:10 of the CCA: if the accounts have not been filed within the time limits, the damage suffered by third parties is, unless proven otherwise, presumed to result from this omission;
• article 2:74: the enterprise court may order the judicial dissolution of a company that has not filed its accounts, the action being admissible only after a period of seven months following the closing of the financial year.

The next filing, a publication in the Belgian Official Gazette or the Central Solvency Register (RegSol) sometimes show the decision taken.

How to read it as a partner

Negative equity does not say everything. Look at:

1. Cash (50/53 + 54/58): does the company have enough to pay its upcoming debts?
2. The result for the year (9904): is the loss continuing, or has the company become profitable again?
3. Debts to shareholders: shareholder loans, sometimes subordinated, can support a young company. They appear as debts (17 or 42/48), not as equity.
4. The age of the company: a start-up that invests before selling often goes through this phase.
5. Taxes, remuneration and social security debts (45): a sharp rise often signals that the company is delaying its payments to the State.

Protecting yourself

For a supplier, negative equity justifies adapted terms: deposit on order, short payment terms, retention of title clause, personal guarantee of a director for a large amount. And consult RegSol, whose consultation is free, before a significant commitment: it contains the bankruptcy and judicial reorganisation procedures opened since 1 May 2018 and still ongoing.