Solvency And Liquidity Analysis

Within in this assignment I will provide a critical analysis on the Solvency and Liquidity test as provided for in terms of the Companies Act. Further, focus will too be placed on the policy rationale and implications that are involved when directors make decisions in relation to the above mentioned tests. To support my legal opinion reference will be made to both case law as well as relevant legislation when dealing with the question at hand.
At its inception, the main aim of the capital maintenance doctrine was to protect the creditors however, as noted by Molefe this has changed over the years, and as a result the relevance of this doctrine was brought into question frequently. Originally, companies were required in terms of the law to

It is further noted that South African law is to an extent based on English law and although the two legislations have drifted, many of the general principles of company law and statutory provisions still correspond in relation to each other thus, making it valuable. One of the main advantages of the England system is that it provides a minimum amount of paid shared capital and further prohibits shares without any par value. New Zealand provided for a successful shift from a system based entirely on English law to a more modern system. It further served as a model for other countries in relation to their company law thus, making it a system to be considered in relation to the above mentioned. In New Zealand, the principle that has been followed is that the requirement of time must be satisfied at the time of the authorization of such distributions even though payment is regarded as prohibited when the directors see that the tests of insolvency and liquidity will not be complied with. New Zealand further places on the directors a duty not to proceed with such distributions if it can see that the liquidity and solvency tests will not be satisfied, similar to the position taken by South Africa. In the Unites States the regulations of companies fall within the powers of the state thus, a state has power to determine how companies should be regulated. Various

S46 provides two instances wherein such distributions can take place. Firstly, where a distribution is subject to any other existing legal obligation of the company and secondly, where a court order requires of the shareholders to grant such a distribution. Before making such a decision the board must ensure that the company has complied with both the solvency and liquidity test and that after the distribution has been made the company will still comply with both these tests. The inference drawn from s46 is that it excludes shareholders in matters relating to distribution and makes it the responsibility of the board to decide unless the memorandum of the company states otherwise. The further implications as provided for by the Act is in terms of s46(6) is subject to s77(3)(e). These sections relate to the liability of a director in relation to distributions that are contrary to s46. A director will be liable and for any consequence if the director was present at a particular meeting and participated in the meeting or participated in the decision making and failed to vote against a specific distribution, despite knowing that such a distribution goes against s46 of the Act. The liability of such a director will only arise if both the solvency and liquidity test cannot be established after the distribution was