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5. Part 5 Transactions in relation to Share Capital

Uniform Solvency Test


Section 204 provides that a uniform solvency test be applicable to a reduction of capital, buy-backs, or financial assistance.


The test is essentially a solvency statement in a specified form made by directors (section 206) who have formed the opinion that the company satisfies the solvency test in relation to the transaction concerned (section 205).


In forming their opinion, the directors must inquire into the company’s state of affairs and prospects, and take into account the contingent and prospective liabilities of the company. The solvency statement must be made and signed by all directors for buy-backs or reductions of capital, and made and signed by a majority of directors for financial assistance.


There is no requirement for an auditors’ report to be attached to the solvency statement.


Reduction of Capital based on Solvency Test


It is now possible to achieve reduction of capital by special resolution (without the necessity of court proceedings), subject to satisfaction of the solvency test and certain specified procedures, as follows:


  1. All the directors need to sign the solvency statement in support of the proposed reduction (section 216).
  2. The company needs to obtain members’ approval by a special resolution (sections 215 and 217).
  3. The company must publish notices with the relevant information in the Gazette and newspapers, and must register the solvency statement with the Registrar (section 218).
  4. Any creditor or non-approving member of the company may, within five weeks after the special resolution is passed, apply to the court for cancellation of the resolution (sections 220221 and 222). During this five-week period, the company must make available the special resolution and solvency statement for members’ and creditors’ inspection (section 219).
  5. The company must deliver to the Registrar after the five-week period (but no later than seven weeks) a return in specified form if there is no court application (section 224), or within 15 days after the court makes the order confirming the special resolution or the proceedings are ended without determination by the court (section 225).


The reduction of share capital takes effect when the return is registered by the Registrar.