21.4 SOLVENCY AND LIQUIDITY –SECTION 46
A buyback falls within the definition of a distribution. It is not the purpose of this paper to deal with all the intricacies of a distribution but as a rule the distribution by a company must be authorised by the company’s board of directors where the distribution is pursuant to an existing obligation of a company or to a Court Order.
S46 says a company must not make any proposed distribution unless the company satisfies the solvency and liquidity test immediately after completing the proposed distribution. If there is an agreement to buy back shares this is enforceable against the company. However, it is not enforceable if the company falls foul of the solvency and liquidity test. If the company alleges that it can’t fulfill its obligations in terms of the agreement the company must apply to court to prove that it would be in breach of the solvency and liquidity test and if the court is satisfied that the company is in breach of this requirement then the court must make an order;
· That is just an equitable having regard to the financial circumstances of the company
· Ensures that the shareholders are paid at the earliest convenience making sure that the company satisfies its other financial obligations.
Where the company re-acquires shares, which are contrary to s48 and s46 the company must apply to court for an order reversing the transaction. The transaction re- acquiring the shares from a shareholder must be reversed. The shares have to be re-issued and the shareholder has to pay the money back to the company.
If the distribution has not been completed within 120 business days after the board has made acknowledgment in terms of the solvency and liquidity the board has to reconsider the solvency and liquidity test with respect to the remaining distribution by once again passing the resolution and doing the solvency and liquidity test.
In the event that something goes wrong directors are liable as provided for in s77(3)(e)(vi)