The health crisis we are experiencing and the restrictive measures adopted to limit its spread are and will be deeply affecting businesses. With all the economic and human consequences that this entails, this ordeal could be fatal for many of them. What are the decisive role and obligations that directors must now adopt to overcome this crisis? What liabilities do they incur?
Which actions should directors take?
Members of the board of directors, individually or collectively, must take all reasonable actions to ensure the continuity of the company.
Directors’ guidelines should remain the same: business decisions must be taken in the best interest of the company, i.e. the long term interest of shareholders taking into account the interests of all stakeholders – like employees, customers, creditors and suppliers.
Directors should carefully assess and proactively address the (possible) impacts of the current crisis as their passivity in a critical situation might be considered as a fault for which they might be held liable.
They should consider all measures approved by the federal and regional governments to help companies in difficulty following the spread of the coronavirus. These measures consist of:
- reducing or deferring companies’ tax and social obligations: getting a payment plan, exemption from interest on late payments, temporary layoff, etc. – see here; and
- regional and federal bonuses depending on the activities of the company: see the Federal measures, and those of the Walloon Region, Brussels-Capital Region and the Flemish Region.
If the company fulfils the required conditions to benefit from these relief measures, it should take timely action to benefit from them to the fullest extent possible.
Directors should make every effort to adapt the company’s business strategy to enable it to maintain a certain level of activity, taking into account the restrictions imposed by the Government. They should consider the need to put all or part of the employees on temporary unemployment for force majeure (on this topic, see our news here) and they should take all necessary precautions to protect the health and welfare of active employees, subcontractors and public at large.
Nevertheless, directors should be careful not to continue a loss-making activity that would appear unreasonable to normally diligent and prudent directors. They will certainly not pursue the activities of a company that would be in the conditions of bankruptcy (see below).
What must directors do when the financial situation of the company becomes critical?
1. The Warning Bell
Directors should not forget to ring the “warning bell” if financial difficulties increase.
Directors of SRL/BV and SC/CV will have to ring the bell (i) when the company’s net assets are negative or are likely to become negative, or (ii) when the company’s liquid assets are no longer sufficient to pay its debts due for the next twelve months.
Constantly and properly monitor the development of the company’s cash flow can prove very difficult. In case of doubt, directors should ring the bell to limit the risk of liability.
Directors of SA/NV will have to ring the bell when, as a result of a loss (i) the net assets are reduced to less than one-half of the share capital or (ii) the net assets are reduced to less than one-quarter of the share capital. Note that in the event of a reduction in the net assets below EUR 61,500, any interested party may request the winding-up of the company in court.
The activation of the warning bell requires the directors to convene the general shareholders meeting within two months of the statement that the abovementioned conditions are met. The directors must then draw up and submit to the general meeting a report in which they propose measures (i) to improve the situation in order to ensure continuity or, (ii) to wind-up the company. In such a case, directors can protect themselves against liability claims by convening a general meeting to decide on the future of the company.
These measures involve the meeting of corporate bodies, which is problematic because of the containment measures. Fortunately, a Royal Decree has introduced exceptional temporary measures extending the possibilities of recourse to the unanimous written decision procedure and the use of telecommunication means for the management body. It also facilitates the use of remote voting and the use of proxies to vote at a general meeting, and allows the management body to postpone general meetings. On this subject, see our news here.
2. Possible measures of continuity: the reorganisation procedure
Directors may propose measures to pursue the company’s activities, notably by initiating a judicial reorganisation procedure.
As mentioned above, the directors should first propose all measures that are likely to reduce future losses, improve the company’s profitability, reduce its expenses or enhance the value of some of its assets.
At this stage, they may also assess the suitability of initiating a judicial reorganisation procedure.
Such a procedure aims at allowing enterprises in financial distress, but still having prospect for recovery, to continue all or part of their business as a going concern, by preventing – during maximum six months (the “Suspension period” – renewable once for six months):
- any sale of the debtor’s movable/immovable assets resulting from creditors’ pending enforcement measures, except when the date of the auction has been scheduled within two months as from the date of the filing of the debtor’s application;
- that the debtor is declared bankrupt or is judicially liquidated.
Because of the health crisis, several courts of enterprise (and notably the French Brussels court of enterprise) have decided to stay all of their hearings from 19 March up until 20 April 2020 (subject to re-evaluation at this date), except for urgent cases.
Nevertheless, if a company may benefit from a judicial reorganisation procedure, we recommend filing a petition via the electronic insolvency registry (REGSOL) even in the absence of hearing until 20 April (or later). Indeed, as long as the court has not ruled on the petition, the debtor is protected from almost all enforcement measures and from a declaration of bankruptcy (art. XX.44 of the Economic Code).
3. In case continuity of the enterprise is compromised: the dissolution of the company
If there is no prospect for recovery and if bankruptcy conditions are not met, the directors should in principle and under normal circumstances (see below) propose the winding-up of the company. To this end, the directors shall submit to the general meeting a special report justifying the winding-up of the company as well as a statement summarising the active and passive situation of the company, dated not more than three months ago. This statement must be subject to an audit report by the statutory auditor or, failing that, by an external auditor or chartered accountant. The winding-up must then be recorded in a notarial deed.
The Royal Federation of Belgian Notaries has instructed the Belgian notaries’ offices to receive only “urgent” deeds, but internal circulars confirm that transactions on corporate assets and warning bell procedures are of such an urgent nature. The notary should confirm this on a case-by-case basis.
Before considering this option, directors will be well advised to keep the company alive to the extent possible and at least until the end of the health crisis to make sure there is no prospect for recovery and, for example, envisage a judicial reorganisation procedure.
4. Final option: the admission of bankruptcy
In case the company cannot overcome its financial difficulties so that the conditions of bankruptcy are met at some point, directors must make an admission of bankruptcy via the electronic insolvency registry (REGSOL). The admission should be filed within the month of the fulfilment of these two conditions:
- when it can no longer pay its debts as they fall due (permanent cessation of payment), and
- when its creditors’ confidence is tainted (its credit is exhausted).
In case they fail to proceed with the admission of bankruptcy, directors might be held liable and might face criminal sanctions. Still, the Government is currently examining the possibility to put on hold the obligation for directors to make an admission of bankruptcy.
Also, governmental discussions are pending about the possibility to freeze bankruptcy proceedings initiated against companies that encounter financial difficulties because of the governmental health security measures. In other words, companies would be protected from being declared bankrupted upon request of a third party/ the Public prosecutor until the end of the crisis.
We are closely monitoring the Government’s decisions in this regard and we will keep you posted as soon as other measures enter into force.
It is not possible at this time to predict the outcome of this crisis. Nor is it possible to determine the extent to which courts and tribunals will show leniency to directors who have not fully complied with their obligations. Many parameters will no doubt be taken into consideration, but proactive directors who meet the basic requirements outlined above should be beyond reproach.