Solvency test makes directors accountable under new Act

Ramani Kangaraarachchi

"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 Mudalige said.

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 proposed.

He stated that directors now have more freedom and more obligations and they need to know with certainty whether the test has been satisfied.

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.