Question

Discuss the conditions of the Solvency Test required of a public company for the purpose of the:

a) redemption of preference shares (15 marks)

b) purchase of its own shares ( 15 marks)

Answer 1

Redemtion of Preferece shares:

As per companies act provisions Solvency test is required if the redemtion of shares is made out of the capital of the company.

All the Directors must file the solvency statement. Company shall file a copy of such solvency statement to registrar. Company satisfies the solvency test if the following conditions are met:

i) Assets of the company must exceed the liabilities of the company at the time of redemption.

ii) Company shall have no ground where the copmany could not pay its debts immediately after the redemption transaction.

iii) Company shall be able to pay its total debts within 12 months of the commencement of winding up, in case the company is looking for the winding up within 12 months of the redemption. In other case, Company shall  be able to pay its debts as and when due during the 12 months of the redemption.

Purchase of its own shares:

Majority of the Directors must file the solvency statement in case of purcahse of its own shares.

Company satisfies the solvency test if the following conditions are met:

1. Company shall not become insolvent due to the purchase of its own shares

2. company shall be remain solvent till the 6 months of the purchase of its own shares