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The Companies Act demands liquidation tests in these four situations

by , 20 October 2014
Did you know, you can't just liquidate your company? The Companies Act actually disallows it. Government updated the Act in 2008 to include compulsory liquidation tests.

You must do these to see if it's really necessary to liquidate your company.

But you still don't have to this 100% of the time. You only need to do these tests in certain situations.

To ensure you do these tests when you need to, read on to discover four situations when the Companies Act demands them.

 

Four situations that require you to do a liquidation test 

 
You must do a liquidity test before you:
 
1. Provide financial assistance to people so they can buy the company's shares (Section 44 of the 2008 Companies Act);
 
2. Make loans to directors (Section 45);
 
3. Declare a dividend (Section 46); and
 
4. Merge with another company (Section 113). 
 
The Act wants to avoid a situation where, for example, a company declares a dividend but after it pays the shareholders, it has no more money left to pay its water, lights, staff salaries, etc.
 
That's why you need to test your company's situation to ensure it's really necessary to liquidate. 
 
Here's how to do a basic liquidation test.
 
*********** Reader's choice  ***************
 
Directors' duties according to the new Companies Act
 
Did you know that being a company director nowadays is not what it used to be? Gone are the days when the title of 'company director' was just a label that brought prestige, extra income and few duties. Today's director faces:
 
Daunting duties, e.g. directors may only use their powers (which have been given to them as directors) to benefit the company;
 
Hefty responsibilities, e.g. the director must act how a reasonable director would act. Gone are the days when if you were a director, and if something went wrong you could hide behind the excuse: 'But I'm not qualified to do this job!' Under the new Companies Act, if you're going to be a company director, you're going to have to get clued up!
 
Potentially serious liabilities – going to jail for 10 years is just one such liability.
 
The 2008 Companies Act, which was introduced on 1 May 2011, sets out a new set of rights and duties for directors. Let's see what they are…
 
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Here's what you must check to do a liquidation test

 
Check if your company will be able to meet all its debts after you do any of the four things I mentioned above. If it can, then your company is liquid and there's no reason to liquidate.
 
Ensure you do a liquidation test before you jump the gun or you could end up without a company and in violation of the Companies Act.
 

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