Possible manipulation of the ‘solvency and liquidity’ test under the Companies Act makes the test an ineffective alternative to the ‘maintenance of capital’ principle

• Jurisdiction: South Africa
• Citation: (2020) 6(1) JCCL&P 40
• Published date: 28 October 2020
• Author: Kadish, J.S.
• Pages: 40-53
• Date: 28 October 2020

40

POSSIBLE MANIPULATION OF

THE ‘SOLVENCY AND LIQUIDITY’

TEST UNDER THE COMPANIES

ACT MAKES THE TEST AN

INEFFECTIVE ALTERNATIVE TO

THE ‘MAINTENANCE OF CAPITAL’

PRINCIPLE

JOSHUA SASHA KADISH*

Attorney at Fluxmans Inc

ABSTRACT

This article argues that although great strides have been made with the

abolition of the maintenance of capital principle and its replacement

by the solvency and liquidity test, the possible manipulation of the

latter test raises questions about whether it is an adequate alternative

to the maintenance of capital principle.

Key words: solvency and liquidity test; maintenance of capital;

distributions; Companies Act 71 of 2008

I INTRODUCTION

The distribution by a company of its assets to its shareholders, whether

in the form of cash or otherwise, ought to be carefully regulated

by any legal system intent on protecting the interests of corporate

creditors.1 Fundamentally, if funds are allowed to flow from the

company to shareholders without assurances that all creditors will

be paid in due course, a limit on these distributions must be devised.

Until 1999, such protection was largely provided for by the

maintenance of capital principle. However, far-reaching amendments

to the Companies Act 61 of 1973 saw the effective abolition of the

maintenance of capital principle and a shift towards a solvency and

liquidity requirement. The Companies Act 71 of 2008 (‘the Act’)

introduces the pervasive solvency and liquidity test as a single standard

*LLM candidate (Wits University).

1 R Jooste ‘Issues relating to the regulation of “distributions” by the 2008 Companies

Act’ (2009) 126 SALJ at 627.

(2020) 6(1) JCCL&P 40

© Juta and Company (Pty) Ltd