Solvency test makes directors accountable under new Act
"The Companies Act 2007 has given company directors more freedom of
action. However in return it has imposed obligations and penalties if
they fail in those obligations" Partner PricewaterhouseCoopers Sujeewa
Addressing a seminar, on the Solvency Test under the new Companies
Act held at Taj Samudra Hotel Colombo recently he said that now the
principle is "Let the managers manage, but make them accountable".
According to him there had been other measures in the past such as
those designed to maintain capital, but they were restrictive, and
sometimes worked against commercial practice.
Mudalige said that solvency is of concern for directors in Sri Lanka
because if a company becomes insolvent, or may possibly becomes
insolvent ,there are major issues for the directors, board members, and
chief financial officers in whatever country or jurisdiction the
organisation may be.
As the shareholders of a company have no further obligation after
they have paid the amount due on their shares and they cannot be
required to contribute to debts owed by the company to third parties or
to creditors of the company. So creditors of the company must have some
reasonable protection which the company law in all countries has
provision for Mudalige said.
He said the solvency test plays an important role in the management
of companies. Although it is not required to be solvent everyday it
trades, the solvency test must be met when certain transactions are
He stated that directors now have more freedom and more obligations
and they need to know with certainty whether the test has been
The solvency test is set out in the Companies Act No 7 of 2007 and
has two arms being the ability to pay debts as they become due and the
value of the assets exceeding liabilities.
Before making a distribution to shareholders, the directors must
consider the relevant solvency test and sign a certificate stating the
reason why they believe the solvency test has been met.