Is my BV bankrupt if equity is negative?

The short answer

No. Negative equity is an important warning sign, but not the same as bankruptcy. Look at ability to pay, financing and continuity.

Basis: art. 2:362, 2:384(3) and 2:216 DCC; art. 1 Dutch Bankruptcy Act (Faillissementswet)

What does negative equity mean?

Negative equity means that, according to the valuations used, the debts exceed the assets. That is a balance sheet position. Bankruptcy is a legal state for which other conditions and a court decision are relevant. So do not conclude from a single negative balance sheet figure alone that the company is already bankrupt.

First investigate what caused the shortfall. Successive losses, a large write-down or earlier distributions have different consequences for the recovery plan. Check that all debts and impairments have been processed. An inventory valued too high can make equity look less negative than justified. Art. 2:362 DCC requires a true and fair view of equity and result. The aim is therefore not to make the equity item look cosmetically positive, but to give a substantiated picture. Have special items assessed when the shortfall is large or the outcome depends heavily on estimates.

Why is liquidity a separate test?

Also make a liquidity plan. A company can temporarily have negative equity and still make payments thanks to available financing. Conversely, a BV with positive equity can lack the money to pay its debts tomorrow. So set expected receipts, wages, taxes, suppliers and repayments side by side per period. Use realistic payment dates and a scenario with disappointing turnover. A commitment from the shareholder only helps when it is sufficiently concrete and enforceable. Keep the agreements and assess whether the financier can actually provide funds when they are needed.

Art. 2:384(3) DCC is relevant to the assumption that activities will be continued. If that assumption is in doubt, the assessment must carry through into valuation and disclosure under the applicable rules. A standard sentence that the shareholder will give support is no substitute for investigation. In case of acute payment problems, also discuss the legal position of the board. An extra dividend distribution or new obligation may then bring other risks. Art. 2:216 DCC contains separate conditions for distributions. The annual accounts and the current decision-making must both match the real financial situation.

How do you assess continuity and measures?

Work out possible measures concretely: adjusting costs, strengthening capital, making payment arrangements or revising financing. A loan from the director-major shareholder (DGA) does not automatically increase equity, not even when it is subordinated. Have it assessed which agreements actually lead to a different equity position, legally and in accounting terms. Check the recovery plan regularly against the actual figures. When payments are no longer feasible, do not wait until the annual reporting is ready before calling in expert help. Negative equity calls for analysis and action; the right response follows from the combination of balance sheet, cash flows and feasible measures.

Sources

• Rechtspraak (Dutch judiciary): applying for bankruptcy
• Raad voor de Jaarverslaggeving (Dutch Accounting Standards Board): uncertainty about continuity

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