Distribution from assets? Keep the double distribution test in mind!

Since January 1, 2020, a dual distribution test with associated reporting requirements has applied to distributions from the assets of private limited companies (BVs) and limited partnerships (CVs). Since then, BVs and CVs may only make distributions from their assets if both the net asset test and the liquidity test yield a positive result. These conditions are intended to ensure the company’s solvency and, consequently, to better protect creditors. The dual distribution test is required for any form of distribution from the company’s assets, such as: the payment of dividends, bonuses, the repurchase of treasury stock, the refund of capital contributions, and compensation upon the exclusion or withdrawal of a shareholder.

The dual test consists of a balance sheet test and a liquidity test: 1. Balance Sheet Test Under the balance sheet test, no distribution may be made if the company’s net assets are negative or would become negative as a result. The company’s net assets are the total amount of its assets minus provisions, liabilities, unamortized costs of incorporation and expansion, and research and development costs. (Art. 5:142 WVV) This test must be performed before the shareholders decide to distribute funds from the company’s capital. 2. Liquidity Test According to this test, capital may only be distributed “if the company, based on reasonably foreseeable developments, remains capable after the distribution of paying its debts as they become due over a period of at least twelve months from the date of the distribution.” (Art. 5:143 WVV) If it cannot do so, the company’s governing body may not make the payment. The liquidity test is conducted after the decision to distribute funds is made, but before any funds are actually paid out. A report must be prepared on these tests, which must also include the necessary accounting and financial data.

The auditor’s intervention is required in the following situations: 1. Net asset test When a decision is made to proceed with a distribution based on a statement of assets and liabilities that is more recent than the most recently approved annual financial statements, the results of the net asset test conducted by the company must be reviewed by the statutory auditor. 2. Liquidity Test In companies where a statutory auditor has been appointed, the accounting and financial data from the report prepared by the company’s governing body as part of the liquidity test must be assessed by the statutory auditor. The Institute of Corporate Auditors (hereinafter “IBR”) has therefore recently proposed two draft standards, namely the standard regarding the statutory auditor’s engagement as provided for by Articles 5: 142 and 6:115 of the Code of Companies and Associations (Net Asset Test) and the standard concerning the statutory auditor’s engagement as provided for by Articles 5: 143 and 6:116 of the Code of Companies and Associations (Liquidity Test), to define the statutory auditor’s duties. These standards took effect on July 13, 2022.

Failure by the company to comply with the conditions—which could cause it to face financial difficulties—is subject to penalties:

• Your company may recover the amounts paid out in error from the individuals who received them.
• Under the new corporate law, directors are jointly and severally liable for any damages resulting from their decisions, both to the company and to third parties.
• If the directors fail to comply with the rules regarding the double balance sheet test, fail to prepare the required reports, or distribute funds despite a negative result on one or both tests, they also risk criminal penalties (fines ranging from 50 to 10,000 euros and even prison terms of one month to one year).

Be sure to take this dual balance sheet test into account if you wish to distribute assets from your BV or CV. Finally, it’s worth noting that for distributions from the assets of a public limited company (NV), you only need to perform the net asset test, and for distributions from the assets of a partnership, a general partnership (VOF), or a limited partnership (CommV), neither test is required. As your trusted partner, Crauwels Advocaten is, of course, happy to assist you with any questions you may have regarding planned distributions from your company’s assets. Please feel free to contact one of our specialists class: button