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Companies Act 1993

Shares and debentures - Redemption of shares

70: Company must satisfy solvency test

You could also call this:

“A company must be able to pay its debts after buying back its own shares”

When a company wants to buy back its own shares, it needs to make sure it can still pay its bills after doing so. This is called the solvency test. The company’s board of directors must be sure that the company will pass this test right after buying back the shares.

The directors who agree to buy back the shares must write and sign a document. This document says that they think the company will pass the solvency test after buying back the shares. They also need to explain why they think this.

If the board changes its mind and no longer thinks the company will pass the solvency test, then the decision to buy back shares is cancelled. This is to protect the company from making a bad financial decision.

If a director doesn’t sign the document saying they think the company will pass the solvency test, they might get in trouble. There’s a punishment for this in section 373(1).

The rules in section 56 also apply when a company decides to buy back its shares, but they might be changed a bit to fit this situation.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM320412.

Topics:
Business > Industry rules
Business > Fair trading
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69: Redemption at option of company, or

“Company can buy back its own shares under specific conditions”

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71: Special redemption of shares, or

“Buying back shares from shareholders under specific conditions”

Part 6 Shares and debentures
Redemption of shares

70Company must satisfy solvency test

  1. A company must not exercise an option to redeem a share unless the board of the company is satisfied on reasonable grounds that the company will, immediately after the share is redeemed, satisfy the solvency test in accordance with section 52.

  2. The directors who vote in favour of exercising the option must sign a certificate stating that, in their opinion, the company will, immediately after the share is redeemed, satisfy the solvency test and the grounds for that opinion.

  3. If, after a resolution is passed under subsection (1) and before the option is exercised, the board ceases to be satisfied on reasonable grounds that the company will, immediately after the share is redeemed, satisfy the solvency test in accordance with section 52, any redemption of the share is deemed not to have been authorised for the purpose of that section.

  4. Every director who fails to comply with subsection (2) commits an offence and is liable on conviction to the penalty set out in section 373(1).

  5. The provisions of section 56 apply in relation to the redemption of a share at the option of the company with such modifications as may be necessary.