Section 4 of the Companies Act specifically deals with solvency and liquidity and requires the test to be performed under several circumstances. But what exactly is solvency and liquidity and why is it so important?
What is Solvency and Liquidity?
Solvency is balance sheet based and assess whether a Company’s assets exceed its liabilities. Liquidity assesses whether a Company can satisfy its debts as they become due and payable and requires a cashflow analysis. Solvency is a long-term assessment (after the next 12 months) and liquidity a short-term assessment (within the following 12 months).
When is a Solvency and Liquidity test required?
A solvency and liquidity test must be performed annually as well as in the following circumstances:
a) When a foreign Company wishes to transfer its registration to the Republic, in order to become a domesticated Company;
b) The provision of financial assistance in connection with the acquisition by the Company of its own securities;
c) The provision of loans to Directors and intra-group loans;
d) Distributions of any kind, including dividends;
e) Issues of capitalisation shares with a cash alternative;
f) Share buy-backs; and
g) Mergers and amalgamation
Why is it so important?
Solvency and liquidity testing provides insight into the financial health of an entity. Ultimately, it demonstrates a business’s ability to continue operations into the foreseeable future and whether it is capable of growth, and to what extent. These tests help us to understand the level of risk a business faces, providing useful indicators to assist in making both short, and long-term decisions.
How can TAT assist?
TAT can assist by engaging with you to identify what business transactions require a solvency and liquidity test as well as perform a solvency and liquidity test that is compliant with the Companies Act.
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