Under Section 46 of the Companies Act, a company cannot pay a dividend, or make any other distribution to shareholders, unless the board has applied the solvency and liquidity test and reasonably concluded the company will still pass it immediately after the payment. Approve a distribution without satisfying that test, and the directors who voted for it, or failed to vote against it, can be held personally liable for the consequences. This isn't a formality to rubber-stamp. It's a legal gate that has to be genuinely passed through, and documented, every time.
Required before dividends, share buy-backs, financial assistance, and mergers · Assets must equal or exceed liabilities, fairly valued · Company must be able to pay debts for 12 months after the test · Board must pass a formal resolution acknowledging the test was applied · Directors who approve an unlawful distribution face personal liability.
Under Section 4 of the Companies Act, a company satisfies the solvency and liquidity test at a particular time if, considering all reasonably foreseeable financial circumstances:
Both limbs must be satisfied. A company can look solvent on a balance sheet basis and still fail the test if a cash flow forecast shows it won't be able to meet obligations as they fall due over the following year.
The solvency and liquidity test isn't something a company must satisfy at all times. It's triggered specifically when certain corporate actions are proposed:
Before any distribution, including a dividend, all three of these must be met:
If a distribution isn't actually paid within 120 business days after the board resolution, court order, or legal obligation arose, the board can't simply proceed on the strength of the original approval. It must reconsider the solvency and liquidity test at that later point and pass a further resolution re-evaluating the company's position. A lot can change financially in 120 business days, and the Act specifically requires the check to be repeated rather than assumed still valid.
Directors who were present at the meeting and failed to vote against an unlawful distribution can be held personally liable for the resulting loss. The company itself may also be liable to creditors for damages if, as a result of the unlawful distribution, it becomes insolvent or illiquid, since South African directors don't owe a direct fiduciary duty to creditors, but the company's own liability to them can still crystallise through this route.
Completing a distribution without proper compliance doesn't automatically void the payment itself, but it creates exactly the kind of downstream legal exposure that surfaces later, in a dispute, an audit, or when a creditor comes looking for someone to hold accountable.
Treat the solvency and liquidity test as a genuine financial exercise every time a distribution is proposed, not a box to tick alongside the dividend declaration. Use current management accounts, not figures from the last audited financial statements if those are months old. Build a realistic 12-month cash flow forecast, not just a balance sheet snapshot. Minute the board resolution properly, recording that the test was applied and what the board concluded, and keep that record with your other statutory documents. If a distribution is delayed past 120 business days, treat that as a trigger to redo the test, not a technicality to overlook.
Planning a dividend, buy-back, or intercompany loan? Dyantyi Chartered runs the solvency and liquidity test properly and documents it the way the Act requires.
A company satisfies the test at a given time if its assets, fairly valued, equal or exceed its liabilities, fairly valued, and it appears the company will be able to pay its debts as they become due in the ordinary course of business for 12 months after the test is considered, or 12 months following the distribution in question.
It must be applied before financial assistance for the acquisition of the company's own shares (Section 44), loans or financial assistance to directors or related companies (Section 45), distributions to shareholders including dividends (Section 46), issuing capitalisation shares with a cash option (Section 47), share buy-backs (Section 48), and amalgamations or mergers (Section 113).
The directors who were present at the meeting and failed to vote against the unlawful distribution can be held personally liable. The company may also be liable to creditors for damages if the unlawful distribution results in the company becoming insolvent or illiquid.
Yes. The board must acknowledge by way of a resolution that it applied the solvency and liquidity test and reasonably concluded the company would satisfy the test immediately after completing the proposed distribution. This resolution should be properly minuted and retained.
The board must reconsider the solvency and liquidity test before proceeding. The company cannot proceed with the distribution under the original resolution, court order, or legal obligation unless the board adopts a further resolution re-evaluating the company's solvency and liquidity at that later point.