WALTER SISULU UNIVERSITY
DEPARTMENT OF ACCOUNTING & TAXATION
COMPANY LAW
[CCL26W2]
2024
TUTORIAL WEEK 6 _Corporate Finance
Self-Study Activities1 (with a memo):
Question 1 (Seen)
Question 2 (Seen)
Tutorial Submission Activity2 (without a memo)
Question (Unseen)
Source: Various
1 To assess basic understanding, it should be completed immediately after post-lecture reading before students attempt the
submission activity.
2. This is the tutorial activity that will be covered in the tutorial session, and students should bring their attempts
to the tutorial session.
Question 1
Solvency and liquidity is dealt with in section 4 of the Companies Act, No. 71 of
2008 (“the Act”) and has been legislated to ensure that a creditor is not
prejudiced by the company stripping itself of material assets or incurring
excessive liabilities. The liquidity element specifically ensures a creditor will be
paid timeously.
There are two elements of the solvency and liquidity test:
The solvency test, tests whether a company’s assets exceed its liabilities
and requires an examination of the balance sheet.
The liquidity test assesses whether a company is able to satisfy its debts
as they become due and payable and requires a cashflow analysis.
Often, we hear of technical solvency which means that at a certain point in time,
the company’s assets when fairly valued, equal to or exceed the company’s
liabilities. Commercial solvency means that the company is able to pay its debts
as they become due and payable and is considered over a 12-month period.
Any company should keep the following financial information, which could be
used in determining the outcome of a solvency and liquidity test:
i. accounting records; financial statements.
ii. fair values of assets and liabilities.
iii. fair values of contingent assets and contingent liabilities; as well as
iv. the use of reasonable and reliable valuation methods.
There are 7 instances as per the Act, in which the solvency and liquidity test
must be applied.
Extracted from an article titled “When should you apply the Solvency and
Liquidity Test” Available from: https://www.rslv.co.za/newsletters/2020/when-
should-you-apply-the-solvency-and-liquidity-test/
REQUIRED:
1. Describe the instances as provided for in the Companies Act 71 of 2008
when it is compulsory to apply the solvency and liquidity test. (5
Marks)
Suggested solution
1. The solvency and liquidity test in compulsory in terms of the Companies Act
71 of 2008 in the following instances:
Before the provision of financial assistance in connection with the
acquisition by the company of its own securities in accordance with
section 44 of the Companies Act 71 of 2008. (1)
Before the provision of loans 2[2to Directors and intra-group loans in
accordance with section 45 of the Companies Act 71 of 2008. (1)
Before a distribution of any kind, including declaration of dividends in
accordance with section 46 of the Companies Act 71 of 2008. (1)
Before issues of capitalisation shares with a cash alternative in accordance
with section 47 of the Companies Act 71 of 2008. (1)
Before a share buy-backs in accordance with section 48 of the Companies
Act 71 of 2008. (1)
Before mergers and amalgamations in accordance with section 113 of the
Companies Act 71 of 2008. (1)
When a foreign Company wishes to transfer its registration to the
Republic, in order to become a domesticated Company in accordance with
section 13 of the Companies Act 71 of 2008. (1)
Adapted from an article titled “When should you apply the Solvency and Liquidity
Test” Available from: https://www.rslv.co.za/newsletters/2020/when-should-you-
apply-the-solvency-and-liquidity-test/
Award 1 mark for well presented, properly laid out, and clearly expressed
answers
Question 2
Section 22(1) of the Companies Act 71 states that a company must not carry on
its business recklessly, with gross negligence, with intent to defraud any person,
or for any fraudulent purpose. In an instance where the Companies and
Intellectual Property Commission have reasonable grounds to believe that a
company is carrying on its business recklessly, with gross negligence, with intent
to defraud any person, or for any fraudulent purpose, they may issue the
company with a notice to show cause why the company should be permitted to
continue carrying on its business.
REQUIRED:
1. What is a compliance notice and who issues a compliance notice? (2
Marks)
2. What is the difference between a notice and a compliance notice in
accordance with section 22(2) and section 22(3) of the Companies Act?
(2 Marks)
3. Who receives a compliance notice? (1
Mark)
4. Under what circumstances is a compliance notice issued? (2
Marks)
5. What are the minimum compulsory contents of a compliance notice? (3
Marks)
6. What happens if the receiver of a compliance notice fails to comply with a
compliance notice? (2 Marks)
7. What are the Directors consequences for trading recklessly? (1
Mark)
Presentation, layout, and clarity of expression (1
Mark)
Suggested solution
1. A compliance notice is a notice from the Companies and Intellectual Property
Commission (1) or Takeover Regulations Panel (1) to perform in a certain
manner or to refrain from performing in a certain manner. (1)
Available
3
Maximum
2
2. A notice is issued to a company in terms section 22(2) to provide reasons why
it should be allowed to continue trading. (1) A compliance notice of the other
hand is issued in terms of section 22(3) to a company that has failed to
provide reasons why it should be allowed to continue to trade in accordance
with the notice issued in terms of section 22(2). (1)
Available
2
Maximum
2
3. A company performing an act in contravention of the Companies Act 71 of
2008 will receive a compliance notice.
(1)
Available
1
Maximum
1
4. The Commission may issue a compliance notice to any person whom it
reasonably believes has contravened the act (1) or has assented to, been
implicated in or benefited from a contravention. (1)
Available
2
Maximum
2
5. A compliance notice must set out the following:
The person or an association to whom the notice applies. (1)
The provision of the Act that has been contravened. (1)
Details of the nature and extent of the non-compliance. (1)
Any steps that are required to be taken and the period within which those
steps must be taken. (1)
Any penalty that may be imposed in terms of this Act if those steps are
not taken. (1)
Available
5
Maximum
3
6. If a person fails to comply with a compliance notice, a court may impose an
administrative fine (1) and the matter may be referred for prosecution as an
offence. (1)
Available
2
Maximum
2
7. In terms of section 77(3) of the Companies Act (0.5), A director of a company
is liable for any loss, damages or costs sustained by the company as a direct
or indirect consequence of the director having conducted business in the
manner contemplated in section 22(1) and knowing that he was doing so. (1)
Available
1.5
Maximum
1
Award 1 mark for well presented, properly laid out, and clearly expressed
answers
Question 3
Ametek (Pty) Ltd (hereafter referred to as “the company”) is a company that operates
in the information and communication technology (ICT) industry. The company’s
main business includes installation of internet cables and computer repairs. The
company was incorporated by two Mthatha university graduates, Zoe, and Aaron in
2018. The company did well from incorporation until 2020 and 2021 due to the
effects of the COVID-19 pandemic. The 2021 financial records, before the
distribution reflected the following:
Ametek Pty Ltd Statement of financial position as at 30 June 2021
ASSETS
Current assets 125,000
Non-current assets 445,000
TOTAL ASSETS 570,000
EQUITY
Share Capital 50,000
Other Reserves 20,000
TOTAL EQUITY 70,000
LIABILITIES
Current liabilities 120,000
Non-current liabilities 380,000
TOTAL LIABILITIES 500,000
During a recent board meeting, the directors of the company resolved to declare a
cash dividend amounting to R10,000. The dividend declaration was approved on the
1st of July 2021. All the amounts in the financial statement are fairly valued.
You are required to:
Comment briefly, in the light of the Companies Act of 2008, on the validity of the
decision taken by the board of directors concerning the payment of dividends.
Support you answer with relevant calculation and reference to the Companies Act.
(10 Marks)
1 mark for presentation and clarity of expression
