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Companies Act 1993

Shares and debentures - Assistance by a company in the purchase of its own shares

77: Company must satisfy solvency test

You could also call this:

“A company must ensure it can pay its bills before helping someone buy its shares”

When your company wants to help someone buy its own shares, it needs to be careful about money. Before giving any financial help, the company’s board must be sure the company will still have enough money to pay its bills. This is called passing the ‘solvency test’.

The directors who agree to give the financial help must write and sign a statement. This statement says they believe the company will still be able to pay its bills after giving the help, and explains why they think this.

If the board changes its mind and thinks the company won’t be able to pay its bills after giving the help, then the company isn’t allowed to give the help anymore.

If a director doesn’t sign the statement when they should, they’re breaking the law. They could get in trouble and face a penalty.

When figuring out if the company can pay its bills, there are special rules. The company can’t count money it has lent out as part of its assets. It must also count any promises to pay money related to helping buy shares as part of what it owes.

These rules work alongside other parts of the law about how companies should manage their money.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM320423.

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“Rules for companies helping someone buy their shares”

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“Rules for companies providing financial assistance to purchase their own shares”

Part 6 Shares and debentures
Assistance by a company in the purchase of its own shares

77Company must satisfy solvency test

  1. A company must not give any financial assistance under section 76 unless the board of the company is satisfied on reasonable grounds that the company will, immediately after the giving of the financial assistance, satisfy the solvency test.

  2. The directors who vote in favour of the giving of the financial assistance must sign a certificate stating that, in their opinion, the company will, immediately after the financial assistance is given, satisfy the solvency test and the grounds for that opinion.

  3. If, after a resolution is passed under subsection (1) and before the financial assistance is given, the board ceases to be satisfied on reasonable grounds that the company will, immediately after the financial assistance is given, satisfy the solvency test, any financial assistance given by the company is deemed not to have been authorised.

  4. Every director of a company 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 giving of financial assistance by a company with such modifications as may be necessary.

  6. In applying the solvency test for the purposes of this section,—

    assets excludes amounts of financial assistance given by the company at any time under section 76 or section 107(1)(e) in the form of loans; and

      liabilities includes the face value of all outstanding liabilities, whether contingent or otherwise, incurred by the company at any time in connection with the giving of financial assistance under section 76 or 107(1)(e).

      1. Nothing in subsection (6) limits or affects the application of section 4(4).

      Notes
      • Section 77(4): amended, on , by section 413 of the Criminal Procedure Act 2011 (2011 No 81).
      • Section 77(6): replaced, on , by section 12 of the Companies Act 1993 Amendment Act 1994 (1994 No 6).
      • Section 77(6) assets: amended, on , by section 5(a) of the Companies Amendment Act (No 2) 2004 (2004 No 24).
      • Section 77(6) liabilities: amended, on , by section 5(b) of the Companies Amendment Act (No 2) 2004 (2004 No 24).
      • Section 77(7): inserted, on , by section 12 of the Companies Act 1993 Amendment Act 1994 (1994 No 6).