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Is there an insolvency or illiquidity test which triggers certain obligations for the debtor company and/or Directors?
There are two tests to determine whether a company is insolvent. These are the Liquidity Test and the Balance Sheet Test and are both outlined in Article 214 (5) of the Companies Act. These tests may be applied by the Court independently of each other.
For Dissolution and Winding Up a company needs to satisfy one of these two tests. For a Company Recovery Procedure, it is enough for the Company to be likely to fail any one of the tests in the near future.
The Liquidity Test
In terms of Article 214(5), if a debt due by the company has remained unsatisfied in whole or in part after 24 weeks from the enforcement of an executive title against the company by any executive act, then the company is deemed to be unable to pay its debts, and would have failed the liquidity test. This would be a ground for the Court to order the dissolution of the company. The reasoning behind this test is that creditors need to be paid in a timely manner. Therefore, a company may be deemed insolvent even if it has assets, such as immovable property, but no liquidity.
The Balance Sheet Test
Moreover, if it is proved to the satisfaction of the Court that the company is unable to pay its debts, account being taken also of contingent and prospective liabilities of the company, then the company shall also be deemed unable to pay its debts. A prerequisite for the court to be able to apply this test is that the company’s financial statements would have to be updated regularly. If the company fails to present financial statements, a matter which combined with other considerations may bring about personal liability of the directors as well as penalties in terms of the Companies Act, then the Court would be unable to apply the Balance Sheet Test.
This document does not purport to give legal, financial or any other advice. Please be directed to seek appropriate advice from warranted professionals. Do not hesitate to contact the Office of the Official Receiver for further information if necessary or for any clarification.