Plain language law

New Zealand law explained for everyone

Companies Act 1993

Preliminary

4: Meaning of solvency test

You could also call this:

“How to check if a company can pay its bills and is worth more than it owes”

The solvency test is a way to check if a company is financially healthy. You can say a company passes this test if it can pay its bills on time and if the things it owns are worth more than what it owes to others.

When the people in charge of a company (called directors) are checking if the company passes the test, they need to look at a few things. They should check the company’s latest financial reports and records. They also need to think about anything else they know that might affect how much the company’s things are worth or how much it owes.

The directors can use reasonable guesses about how much things are worth or how much the company owes. This helps them decide if the company passes the test.

If companies are joining together (called amalgamating), the directors need to do a similar check. They look at the financial reports and records of all the companies joining together. They also think about anything else that might affect how much the new, bigger company will own or owe.

When thinking about things the company might have to pay in the future (called contingent liabilities), the directors can consider how likely it is that the company will actually have to pay. They can also think about any claims the company could make to reduce or cancel out these possible future payments.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM319998.

Topics:
Business > Industry rules
Business > Fair trading
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Part 1 Preliminary

4Meaning of solvency test

  1. For the purposes of this Act, a company satisfies the solvency test if—

  2. the company is able to pay its debts as they become due in the normal course of business; and
    1. the value of the company's assets is greater than the value of its liabilities, including contingent liabilities.

      1. Without limiting sections 52 and 55(3), in determining for the purposes of this Act (other than sections 221 and 222 which relate to amalgamations) whether the value of a company's assets is greater than the value of its liabilities, including contingent liabilities, the directors—

      2. must have regard to—
        1. the most recent financial statements of the company that are prepared under this Act or any other enactment (if any); and
          1. the accounting records of the company; and
            1. all other circumstances that the directors know or ought to know affect, or may affect, the value of the company's assets and the value of the company's liabilities, including its contingent liabilities:
            2. may rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.

              1. Without limiting sections 221 and 222, in determining for the purposes of those sections whether the value of the amalgamated company's assets will be greater than the value of its liabilities, including contingent liabilities, the directors of each amalgamating company—

              2. must have regard to—
                1. the most recent financial statements of each amalgamating company that are prepared under this Act or any other enactment (if any); and
                  1. the accounting records of the amalgamating company; and
                    1. all other circumstances that the directors know or ought to know would affect, or may affect, the value of the amalgamated company's assets and the value of its liabilities, including contingent liabilities:
                    2. may rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.

                      1. In determining, for the purposes of this section, the value of a contingent liability, account may be taken of—

                      2. the likelihood of the contingency occurring; and
                        1. any claim the company is entitled to make and can reasonably expect to be met to reduce or extinguish the contingent liability.

                          Notes
                          • Section 4(2)(a)(i): replaced, on , by section 25(1) of the Financial Reporting (Amendments to Other Enactments) Act 2013 (2013 No 102).
                          • Section 4(2)(a)(ia): inserted, on , by section 25(1) of the Financial Reporting (Amendments to Other Enactments) Act 2013 (2013 No 102).
                          • Section 4(3)(a)(i): replaced, on , by section 25(2) of the Financial Reporting (Amendments to Other Enactments) Act 2013 (2013 No 102).
                          • Section 4(3)(a)(ia): inserted, on , by section 25(2) of the Financial Reporting (Amendments to Other Enactments) Act 2013 (2013 No 102).