A trend has arisen, which has not gone unnoticed by the CIPC, where companies are failing to conduct the solvency and liquidity test in accordance with section 4 of the Companies Act, 2008, for instance when declaring a dividend. A failure to do so can have personal consequences for directors.
The CIPC reviews annual financial statements to monitor compliance with the International Financial Reporting Standards (IFRS) and the Companies Act. In certain annual financial statements reviewed by the CIPC, the CIPC reports that some of the main reasons for continuous non-compliance with the solvency and liquidity test requirements relates to the lack of knowledge and due care by the board of directors.
The CIPC has therefore recommended that the Directors Report should include the following disclosure by the directors in the annual financial statements:
Solvency and Liquidity Test
The directors have performed all solvency and liquidity tests required by the Companies Act of South Africa.
This disclosure will ensure that the board of directors acknowledges that they have performed and applied the solvency and liquidity test according to the legislated requirements prescribed in the Companies Act.
*This blog was co-authored by Devan Falconer, Candidate Attorney