The Companies Act of April 2007 introduced the concept of a “Solvency Test” that should be satisfied by a company before and after a number of transactions including but not limited to distributions, purchase of its own shares and capital reductions. The solvency test imposes an obligation on the directors of a company to ensure that the company is solvent and healthy.
The Solvency Test is deemed to be satisfied by a company if it is able to pay its debts as they become due in the normal course of its business and the value of the company’s assets is greater than the value of its liabilities, and the company’s issued paid up capital.
In determining whether a company satisfies the solvency test, directors are mandated to take into account:
- the most recent financial statements of the company;
- the circumstances the directors know or ought to know which affect the value of the company’s assets and liabilities;
The Board may also take into account a fair valuation or other method of assessing the value of the assets and liabilities of the company.
It is an obligation on the part of the directors of a company to call a meeting of the board of directors to decide whether the company should be wound up in the event that directors believe that the company is unable to pay its debts. Where a director fails to comply with such requirement and at the time of such failure the company was unable to pay its debts as they fell due and the company is subsequently placed in liquidation, the court may on the application of the liquidator or of a creditor of the company, make an order that the director(s) shall be personally liable for the whole or any part of any loss suffered by creditors of the company as a result of the company continuing to carry on such business.
The directors of a company sought to be wound up may be held jointly and severally liable if such has carried on business when deemed to be insolvent during their tenure of directorship.