Solvency and liquidity

Question 1

Capital maintenance

Answer 1

-2008 Companies Act abolished capital maintenance
-If any company is liquidated, then the creditors are paid first and then the shareholders.

-Issued share capital is also not an indicator of creditworthiness because a company could, for example, obtain funds through loans and must be able to pay debts even though it has few issued shares.
-Companies were therefore often undercapitalised.

Question 2

Solvency and liquidity test

Answer 2

s4:
Solvency:
The assets of the company, as fairly valued, equal or exceed the liabilities of the company, as fairly valued= Balance sheet test

Liquidity:
It appears that the company will be able to pay its debts as they come due in the ordinary course of business for a period of 12 months after the date on which the test is considered

Question 3

When are the solvency and liquidity test applied: Distribution to shareholders

Answer 3

Direct or indirect transfer by a company of money or other property of the company (excluding its own shares) to one or more shareholders

Rationale: To protect creditors and minority shareholders, distributions are regulated.

The shareholder owes the company money, and the company can decide to forgive them, this will also be a distribution.

1. In the form of a dividend
2. As payment in lieu of a capitalisation share
3. As consideration for the acquisition by the company of any of its shares
4. Otherwise in respect of any of the shares of that company
5. Incurrence of a debt or other obligation by a company for the benefit of one or more shareholders
6. Forgiveness or waiver by a company of a debt or obligation owed to the company by one or more shareholders

Requirements:
1. Appears that the company will satisfy the S and L test immediately after proposal
1. Board by resolution has acknowledged that it has applied the S and L tests.

Distribution not completed within 120 business days after resolution- S and L test reapplied

Question 4

When are the solvency and liquidity test applied: Acquisition of its own shares

Answer 4

Effect: Shares cancelled

Requirements:
1) Reasonably appears that the company will satisfy the S and L test immediately after acquisition
2) Board by resolution has acknowledged that it has applied the S and L test and reasonably concluded that the company will satisfy the S and L test immediately after completing the proposed distribution

Question 5

When are the solvency and liquidity tests applied: Providing financial assistance

Answer 5

A company is allowed to lend money to a person for them to purchase shares in a company

Types:
1. loan
2. guarantee
3. Provision of security

*MOI can limit the provision of financial assistance
*Board has to authorise the provision

The particular provision of financial assistance is according to an employee share scheme;
OR
according to a special resolution of the shareholders, adopted within the previous two years, which approved such assistance either for the specific recipient, or generally for a category of potential recipients

Requirements:
1. Immediately after provision the company satisfies the S and L test
2. Terms are fair and reasonable to the company
3. Conditions or restrictions in MOI are satisfied