BELGIAN UPDATE – Amended Procedure for the Liquidation of Belgian Companies
- On 19 March 2012 the King ratified a new act modifying the Belgian Companies’ Code with respect to the procedure for the liquidation of Belgian companies. The Act comes into force on 17 May 2012.
- The purpose of the Act is twofold: on the one hand, a series of procedural amendments for company liquidations which resolve certain difficulties and practical problems and, on the other hand, the introduction of a procedure for winding-up (dissolution) and liquidation of companies in one and the same notarial deed.
In Belgium there are two ways of terminating a company: bankruptcy or winding-up. Under Belgian law, any company which (i) is in an on-going situation where it is unable to meet its debts (cessation of payments) and (ii) has lost the trust of its creditors (creditworthiness) is in a state of bankruptcy. Both conditions must be met.
The winding-up of a company can occur by a voluntary decision of an extra-ordinary general meeting (EGM), by a court decision upon a petition for judicial dissolution, or automatically by law (e.g. upon the expiry of a company’s term).
The liquidation of a company is the next step after a company’s winding-up. It implies that a liquidator (or several liquidators) sell the company’s assets, repay the debts and allocate any positive balance among the shareholders in compliance with the objectives prescribed by law or the company’s articles of association.
To give a complete picture, it should be noted that a company can be wound-up without being put into liquidation, as a result of certain reorganisation procedures under the Belgian Companies’ Code (the “BCC”), i.e. mergers and demergers. Such reorganisation procedures, however, fall outside the scope of the Act and, consequently, outside the scope of this contribution.
On 19 March 2012 a new act was ratified by the King modifying the BCC as regards the liquidation procedure for Belgian companies (the “Act”). The Act was recently published in the Belgian State Gazette on 7 May 2012 and is due to come into force on the tenth day after its publication, i.e. on 17 May 2012.
Since the ‘Act of 2 June 2006’, intended to improve the liquidation procedure, certain provisions in the law were not clear or feasible or were subject to misinterpretation. The first goal of the Act, therefore, has been to amend such provisions and to clarify the law on certain points. The Act also puts an end to differences of interpretation among legal scholars. We will not go into further detail on this as it does not materially affects the procedure.
The second goal of the Act has been to introduce a simplified liquidation procedure. As opposed to the incorporation of a company in Belgium, the standard procedure for winding-up and liquidation of a company is a relatively cumbersome and time consuming (and therefore costly) procedure. The reason for this is that the ‘Act of 2 June 2006’ placed the liquidation procedure under judicial control, i.e. at two moments in the procedure, a court decision must be obtained: the first, to have a liquidator appointment or approved and the second, to secure the court’s consent to the proposed distribution scheme.
This standard procedure was in reaction to previous abuses by some liquidators and exclusively benefited the company’s creditors. This is also the reason why such procedure should remain the standard procedure for most companies. For some companies, however, e.g. non-active or dormant companies, small or medium sized companies which are to be terminated due to the retirement or passing of the sole shareholder, etc. this lengthy procedure seems a bit disproportionate.
The Act, therefore, introduces the possibility of winding-up and liquidating a company in one and the same notarial deed subject to certain strict conditions but without the need for court intervention (the “Simplified Liquidation”). This practice already existed before the Act and was based on a circular letter of the Minister of Justice dated 14 November 2006. Because there was no legal basis for this practice in the BCC, a majority of notaries refused to follow this procedure. Some notaries did follow it, however, and this created a considerable degree of legal uncertainty. After six years, the legislator finally responded by implementing the Act.
Based on the Act, Simplified Liquidation is now possible, provided that the following cumulative conditions are fulfilled:
- No liquidator is appointed;
- Based on a recent statement of assets and liabilities, the company has no liabilities at all at the time the company is wound-up;
- All shareholders are present or represented at the EGM at which the resolution for winding-up is adopted;
- The EGM unanimously approves the winding-up and immediate closing of the liquidation of the company;
- The remaining assets are allocated to the shareholders.
Pursuant to this procedure the company is wound-up and, assuming the company has no liabilities, there is no need for any further liquidation procedure, and thus no obligation to appoint a liquidator. Immediately following the decision to wind-up the company, the ‘liquidation’ of the company is closed. The remaining assets of the company will be distributed to the shareholders.
The second condition, however, is a somewhat problematic condition for two reasons. First, the legislator refers to ‘liabilities’ instead of ‘debts’. However, accounting entries such as ‘share capital’ and ‘reserves’ are also recorded on the liability side of financial statements. Supposedly, the legislator means ‘no debts’ instead of ‘no liabilities’. Secondly, liabilities which are not recorded in financial statements (e.g. deferred tax liabilities, pending litigation claims, future guarantee obligations, etc.) seem not to be included in the condition’s scope. The legislator does not specify how such future liabilities have to be treated.
One possible solution is an explicit statement in the notarial deed to the effect that not only the assets but also the future liabilities, if any, are distributed to the shareholders. As the legislator remains silent on this point, we assume that notarial practice will adopt this as a protection mechanism for future creditors.
Another potential problem could be the organisation by the directors of a so-called factual liquidation to anticipate and avoid the rather complicated and lengthy (standard) liquidation procedure and prepare the company to comply with the conditions for a Simplified Liquidation. The directors could be tempted to sell the assets and repay the debts before the winding-up, i.e. without complying with the standard BCC procedure. However, as directors are required at all times to act in the company’s best interest, in accordance with its corporate objects and in continuity, this could trigger directors’ liability as being contrary to the law.
It should be noted, however, that there is an important difference between directors’ liability and liquidators’ liability. Liquidators, unlike directors, are liable towards third parties and shareholders for the performance of their duties and for any shortcoming in their management.
The Simplified Procedure is a positive development which is in keeping with the tendency towards simplification and clarification of Belgian corporate law. However, it is likely that the time and cost savings of the Simplified Procedure will encourage many to arrange company liquidations to take advantage of those benefits and, in particular, avoid court supervision designed to safeguard the interests of creditors. It is to be hoped that the conditions of the Simplified Procedure will be properly applied and that abuse will not erode the protection of creditors interests nor make the standard procedure redundant.