Malan liquidating trust
Secondly, whether the company will be able to pay its debts as they become due in the ordinary course of business for a period of twelve months after the test is considered, or in the case of a distribution contemplated in the first category of the definition, twelve months following that distribution (this is often termed factual solvency).
While the Act attempts to specify what financial information must be taken into account when considering the solvency and liquidity test, the provisions are not that clear, apart from requiring the board to consider accounting records and financial statements satisfying the requirements of the Act and that the board must consider a fair valuation of the company’s assets and liabilities.
Section 46 of the Act sets out the requirements that a company must meet before making a distribution.
A company must not make any proposed distribution to its shareholders unless the distribution: (i) has been authorised by the board of directors by way of adopting a resolution (unless such distribution is pursuant to an existing obligation of the company or a court order); (ii) it reasonably appears that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution; and (iii) the board of the company acknowledges, by way of a resolution, that it has applied the solvency and liquidity test and reasonably concluded that the company will satisfy same immediately after completing the proposed distribution.
Directors liability for unlawful distributions If a director does not follow the requirements for making a distribution and resolves to make such distribution (either at a meeting or by round robin resolution) despite knowing that the requirements have not been met, then that director can be held personally liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director failing to vote against the making of that distribution.
There are, however, limitations placed on a director’s potential liability, in that such liability only arises if: (i) immediately after making all of the distribution (no liability can arise for partial implementation), the company does not satisfy the solvency and liquidity test; and (ii) it was unreasonable at the time of the resolution to come to the conclusion that the company would satisfy the solvency and liquidity test after making the relevant distribution.
This is clearly to protect the interests of creditors and minority shareholders of the company.
You will also have noticed that the Act does not deal separately with the different types of distributions and includes a wide variety of transactions which will be regarded as a distribution under the Act.
The court may grant relief to the director if he has acted honestly and reasonably or, having regard to the circumstances, it would be fair to excuse the director.
What happens if a distribution is authorised by the board but not fully implemented?
When the board of the company has adopted a resolution, acknowledging that it has applied the solvency and liquidity test and reasonably concluded that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution, then that distribution must be fully carried out.
A mutual fund whose primary investment objective is substantial capital gains.
The return and principal value of mutual funds fluctuate with changes in market conditions.