{"id":218490,"date":"2022-11-09T12:04:56","date_gmt":"2022-11-08T23:04:56","guid":{"rendered":"https:\/\/legalvision.co.nz\/?p=218490"},"modified":"2022-11-09T16:29:11","modified_gmt":"2022-11-09T03:29:11","slug":"solvency-test","status":"publish","type":"post","link":"https:\/\/legalvision.co.nz\/corporations\/solvency-test\/","title":{"rendered":"What Should I Know About the Solvency Test in NZ?"},"content":{"rendered":"\n<p>As a business owner, you are likely aware that your business\u2019 solvency is crucial to its ongoing operation. After all, a business must be able to pay debts. However, your business does not have to meet the solvency test every day it operates. Instead, it only needs to meet the requirements in the circumstances outlined in the <em>Companies Act 1993<\/em>. This article will outline what the solvency test involves.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Solvency Test Requirements<\/h2>\n\n\n\n<p>The solvency test has two limbs. The first relates to trading solvency. Under this limb, your company needs to be able to pay its debts as they become due.&nbsp;<\/p>\n\n\n\n<p>Moreover, the second test relates to balance sheet insolvency. This is where the value of your company\u2019s assets needs to be greater than the value of your liabilities.<\/p>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p>Under the <em data-rich-text-format-boundary=\"true\">Companies Act 1993<\/em>, your company satisfies the solvency test if it satisfies the above limbs.<\/p>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\">Contingent Liabilities<\/h2>\n\n\n\n<p>When considering your business\u2019 liabilities, you must include your contingent liabilities in light of your:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>most recent financial statements;<\/li><li>account records; and<\/li><li>other circumstances which may affect the value of your company assets or liabilities.<\/li><\/ul>\n\n\n\n<p>Contingent liabilities can impact your solvency certification or the validity of a distribution. These types of liabilities include:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>guarantee obligations;<\/li><li>credit letters;<\/li><li>bills of exchange; and<\/li><li>current or pending litigation issues.<\/li><\/ul>\n\n\n\n<p>Moreover, when valuing your contingent liability, you can consider:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>the likelihood of the contingency happening; and<\/li><li>any claim your business can make and reasonably expect to be met to reduce the contingent liability.<\/li><\/ul>\n\n\n\n<p>If you are aware of any contingencies, you must take action to determine their potential costs and outcomes. Ultimately, it is best to be realistic when assessing your solvency.<\/p>\n\n\n\n\n<a href=\"#content-next\"\n   class=\"block p-4 mt-10 text-xl font-bold text-center text-white no-underline bg-gray-800 rounded-t-xl\">\n    Continue reading this article below the form\n    <i class=\"text-xl fa-regular fa-arrow-down\"><\/i>\n<\/a>\n<div class=\"px-6 pt-10 pb-12 mb-10 text-center bg-gray-100 rounded-b-xl sm:px-12 test\">\n    <div class=\"mb-8 text-2xl font-bold text-orange\">\n        Need legal advice?\n        <br>\n        <span class=\"text-lg not-prose\">\n                            Call <a href=\"tel:+64800005570\" class=\"not-prose\">0800 005 570<\/a> for urgent assistance.\n                <br>\n                Otherwise, complete this form, and we will contact you within one business day.\n                    <\/span>\n    <\/div>\n\n    \n\n<div class=\"not-prose flex justify-center text-left gform_input_bg_white    \">\n    <script>\nvar 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Situations include when you:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>make distributions for the benefit of your shareholders, including a dividend;<\/li><li>purchase shares;<\/li><li><a href=\"https:\/\/legalvision.co.nz\/startups\/issue-shares-options-incentivise-employees-startup\/\">exercise share redemption options<\/a>;<\/li><li>obtain financial assistance to obtain shares;<\/li><li>undergo amalgamation; and<\/li><li>are 20 days before a solvent liquidation.<\/li><\/ul>\n\n\n\n<p>Moreover, <a href=\"https:\/\/legalvision.co.nz\/corporations\/directors-duties\/\">all the directors<\/a> of your company need to sign a solvency certificate stating that your company meets the solvency test. If the board of directors realises your company will not be solvent after a distribution or share purchase, then any of the above actions will be deemed not to have been authorised.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What if Your Company is Insolvent?<\/h2>\n\n\n\n<p><a href=\"https:\/\/legalvision.co.nz\/corporations\/trade-whilst-insolvent\/\">If your business is insolvent,<\/a> the court may grant an exemption. The exemption only applies to the scenario of purchasing shares. You can apply for an exemption if:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>you have received a notice requiring a share purchase;<\/li><li>your board of directors has agreed that a share purchase would cause your company to fail the solvency test; and<\/li><li>your company has made reasonable efforts for the shares to be purchased but has failed.<\/li><\/ul>\n\n\n\n<p>If your application succeeds, the court may make an order:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>exempting your company from purchasing shares; or<\/li><li>suspending the obligation to buy shares.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Personal Liability<\/h2>\n\n\n\n<p>Your directors can be held personally liable if:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>they fail to sign the solvency certificate;<\/li><li>they did not follow the process for authorising a transaction;<\/li><li>they signed the solvency test while there were no reasonable grounds to believe the company was solvent; or<\/li><li>between the date of approving the transaction and its execution, there is a change of circumstance affecting your company\u2019s solvency, but the transaction happens regardless.&nbsp;<\/li><\/ul>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p>The penalty for signing a solvency certificate while knowing it is false or misleading is a fine not exceeding $200,000 or imprisonment not exceeding five years. Moreover, if a director votes in favour of a transaction but does not sign the certificate, they can be fined $5,000 or less.<\/p>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\">Reducing Your Liability<\/h2>\n\n\n\n<p>The best way to reduce your personal liability is to ensure all your company details are honest, and that financial statements support solvency certificates. Moreover, you should prepare all the necessary documents so your directors can make an informed decision.&nbsp;<\/p>\n\n\n\n<p>Furthermore, if you doubt your company may become insolvent after a transaction, you should raise your doubts and avoid signing the solvency certificate. Instead, you can ask your accountant to verify your business\u2019 financial standing and to gather evidence as to why you have refused to sign.&nbsp;<\/p>\n\n\n\n    <div class=\"my-7 lg:my-10 border-y-2 border-gray-100 py-7 lg:py-10 flex flex-col sm:flex-row items-start gap-10\">\n                    <img decoding=\"async\" class=\"w-52 mx-auto my-0! rounded\" src=\"https:\/\/img.legalvision.com.au\/wp-content\/uploads\/sites\/2\/2022\/10\/11133736\/NZ-Directors-Duties-560x792-1.jpg\" alt=\"Front page of publication\"\n                 loading=\"lazy\" width=\"208\" height=\"298\">\n                <section>\n            <div class=\"text-2xl font-bold\">NZ Directors Duties<\/div>\n            <div class=\"body-text\">\n                <p>Understand your role as a director and how to meet your legal obligations. Download our free guide today.<\/p>\n            <\/div>\n            \n\n<a href=\"https:\/\/go.legalvision.co.nz\/nz-directors-duties-guide.html\" class=\" block px-5 py-3.5 max-w-fit bg-orange button__hover transition rounded text-white font-bold text-lg no-underline uppercase leading-tight text-center\" target=\"\" rel=\"\">Download Now<\/a>        <\/section>\n    <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">Key Takeaways<\/h2>\n\n\n\n<p>The solvency test ensures your company can pay its debts after a transaction. You must account for your contingent liabilities. Directors must sign a solvency certificate under the <em>Companies Act 1993&nbsp; <\/em>to state the company will be solvent after the transaction. Ultimately, you must be aware of personal liability risks and ensure you act in good faith and honesty.&nbsp;<\/p>\n\n\n\n<p>If you need help understanding the solvency test, you can contact our experienced <a href=\"https:\/\/legalvision.co.nz\/corporate-lawyers-lp\">business lawyers<\/a> to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at&nbsp; <a href=\"tel:+64800005570\" class=\"AVANSERnumber dynamic-number\">0800 005 570<\/a> or visit our <a href=\"https:\/\/legalvision.co.nz\/membership\/\">membership page<\/a>.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Frequently Asked Questions<\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1667948078195\"><strong class=\"schema-faq-question\"><strong>What is the solvency test?<\/strong><\/strong> <p class=\"schema-faq-answer\">The solvency test assesses your company\u2019s position to pay its debts. It has two limbs, including trading solvency and balance sheet solvency.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1667948092089\"><strong class=\"schema-faq-question\"><strong>Do I need to consider contingent liabilities?<\/strong><\/strong> <p class=\"schema-faq-answer\">Yes. Otherwise, you cannot realistically assess your company\u2019s solvency. Instead, you must consider the likelihood of the contingency happening and its related costs and outcomes.<\/p> <\/div> <\/div>\n<div class=\"not-prose m-feedback-prompt\">\n    <!-- Thumbs up\/down bar -->\n    <div class=\"m-feedback-prompt__main\">\n        <div class=\"m-feedback-prompt__title\">Was this article helpful?<\/div>\n        <div>\n            <!--span class=\"m-feedback-prompt__button--text\">Thanks!<\/span-->\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--yes\"\n                    data-analytics-link=\"feedback-prompt:yes\" aria-label=\"Agree\">\n                <i class=\"fa-regular fa-thumbs-up fa-3x\"><\/i>\n            <\/button>\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--no\"\n                    data-analytics-link=\"feedback-prompt:no\" aria-label=\"Disagree\">\n                <i class=\"fa-regular fa-thumbs-down fa-3x\"><\/i>\n            <\/button>\n        <\/div>\n    <\/div>\n\n    <!-- Feedback form -->\n    <div class=\"m-feedback-prompt__form\">\n        <div class=\"m-feedback-prompt__form--thanks \">\n            <div>Thanks!<\/div>\n            <p>\n                We appreciate your feedback \u2013 your submission has been successfully received.            <\/p>\n        <\/div>\n        <form id=\"contact-form\" class=\"m-feedback-prompt__form--form\" action=\"\" method=\"post\">\n            <input type=\"hidden\" id=\"authenticity_token\" name=\"authenticity_token\" value=\"90c4126e1b\" \/><input type=\"hidden\" name=\"_wp_http_referer\" value=\"\/api\/wp\/v2\/posts\/218490\" \/>            <input value=\"https:\/\/legalvision.co.nz\/corporations\/solvency-test\/\" type=\"hidden\" name=\"currenturl\"\n                   id=\"currenturl\">\n            <input value=\"What Should I Know About the Solvency Test in NZ?\" type=\"hidden\" name=\"currenttitle\"\n                   id=\"currenttitle\">\n            <label>\n                <!-- display on thumbs-up -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--yes\">\n                    Can you tell us <span class=\"font-semibold\">why<\/span> you found it helpful?\n                <\/span>\n\n                <!-- display on thumbs-down -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--no text-lg\">\n                    How can we better improve this article?\n                <\/span>\n                <textarea name=\"feedbackmessage\" id=\"feedbackmessage\" required><\/textarea>\n            <\/label>\n\n            <div class=\"m-feedback-prompt__form--error\" id=\"form-submit-error\"><\/div>\n            <button id=\"submit-contact-form-button\" type=\"submit\" name=\"commit\" class=\"m-feedback-prompt__form--submit\"\n                    data-analytics-link=\"feedback-prompt:submit\">\n                Submit            <\/button>\n        <\/form>\n    <\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>As a business owner, you are likely aware that your business\u2019 solvency is crucial to its ongoing operation. After all, a business must be able to pay debts. However, your business does not have to meet the solvency test every day it operates. Instead, it only needs to meet the requirements in the circumstances outlined<a href=\"https:\/\/legalvision.co.nz\/corporations\/solvency-test\/\">Continue reading <span class=\"sr-only\">&#8220;What Should I Know About the Solvency Test in NZ?&#8221;<\/span><\/a><\/p>\n","protected":false},"author":13316,"featured_media":215461,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"207014,206010,1190,1404,207463,213069","_relevanssi_noindex_reason":"","editor_notices":[],"footnotes":""},"categories":[14],"tags":[1609,1610,1611,1612],"class_list":["post-218490","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporations","tag-solvency","tag-solvency-test","tag-contingent-liabilities","tag-balance-sheet"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.1.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What is the Solvency Test in NZ? 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