SOLVENCY
22 March 2017 By PDSNETThe ability of a company to pay its expected short-term liabilities out of its expected short-term assets and incomes. With the introduction of the new Companies Act (71 of 2008) company law shifted from a doctrine of asset protection to a doctrine of solvency and liquidity. Whereas previously, the Act had been concerned to ensure that dividends were paid only from profits, the emphasis is now on whether the company's solvency and liquidity is sufficient to afford the dividend. A company can be profitable, but illiquid - which can ultimately result in its liquidation. If all its profits are tied up in working capital, like stock (inventory) and debtors then there might be insufficient cash to meet current liabilities on time. Before a dividend can be paid or the company can buy its own shares back the directors must sign a document to certify that the company is solvent.
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