Directors, be aware of potential liability when proposing a dividend distribution !

Even if a dividend distribution is permissible considering the balance sheet and liquidity tests under corporate law, it may still give rise to directors' liability.

Since the entry into force of the Code of Companies and Associations (CCA) in 2020, a limited company (BV) may – in order to protect creditors – only pay a dividend to its shareholders after a double distribution test that must be positive in each case. 

As such, the dividend may not cause the net assets of the company to be or become negative (balance sheet test or net assets test).  Moreover, the decision of the general meeting of shareholders to distribute a dividend has effect only after the directors have determined that, according to the reasonably anticipated developments, the company will remain able to pay its debts after the distribution as they become due over a period of at least 12 months from the date of the dividend (liquidity test). The decision of the directors with regard to the liquidity test is justified in a report and, in companies where an auditor has been appointed, the auditor reviews the historical and prospective accounting and financial data of this report. 

Pursuant to the abolished Code of Companies a dividend distribution in a BVBA required that the net assets on the date of the closing of the last financial year were not below the amount of the paid-up (or, if higher, the called-up) capital plus all reserves that may not be distributed under the law or the articles of association. The modification of the balance sheet test and the additional liquidity test for the BV as a consequence of the CCA, is motivated by the abolishment of the capital and the (minimum) capital requirements.  

Dividend payments that disregard the aforementioned corporate law limitations can be reclaimed from the relevant shareholders by the BV. In addition, the directors of such a BValso risk liability to the company and third parties for damages. After all, the directors make the dividend distribution proposal to the shareholders and bear the responsibility to ensure compliance with the corporate law quantitative restrictions.

In a case that was brought before the Supreme Court (download the case below), the question was raised whether directors could still be held liable for a dividend distribution while complying with all company law quantitative restrictions (as applicable before the entry into force of the CCA in 2020). The Court briefly ruled that a director's proposal to distribute dividends could constitute manifest gross misconduct that contributed to the bankruptcy, even if that proposal remained within the quantitative limitations of company law. As to the factual interpretation of such manifestly gross error (on which the Supreme Court could not rule), the Court of Appeal had already ruled that the director was liable because of (among other things) the combination of (i) the dividend distribution with profits realized from the sale of the only real estate to settle a current account debt of the director and (ii) the continuation of a deficit activity without a necessary financial buffer.

As mentioned, the Supreme Court ruled on the dividend distribution under the provisions of the old Code of Companies where, under company law, only the net assets test had to be complied with (and thus not the currently additional liquidity test). Despite the fact that the net assets test had been passed in this case, the Supreme Court ruled - given the company's bankruptcy - that there was directors' liability for manifest gross misconduct that contributed to such bankruptcy. It will be interesting to see in the coming years how case law deals with the additional liquidity test in the context of BV dividend payments.  

 As a director, it would therefore be wise, when proposing a dividend distribution to the general meeting of shareholders, to assess the appropriateness and potential impact of the dividend on the company, both in accounting and legal terms. Directors cannot limit themselves to a purely accounting analysis (balance sheet and liquidity test), but must also consider whether it is at all reasonable and prudent to propose a dividend distribution as a director under the specific circumstances. 

Lydian advises directors in this analysis so that a dividend distribution is final and a recovery by (creditors of) the company is avoided as well as possible directors' liability.

Maxime Colle
Jo Willems