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oth the balance sheet and cash flow test. 100 In addition to the current legal
framework, CLRC recommended a solvency declaration by a majority of directors to
be adopted. 101 For reduction of capital, the CLRC recommended all directors to
make a declaration of solvency as an alternative to the current regime which requires
court‟s approval. 102 The CLRC also proposes for directors to be subjected to
criminal liability if they fail to make a true declaration. This would also apply to
shareholders for the amount they receive as a result of the reduction unless they do
so in good faith. 103 It illustrates the committee‟s seriousness in implementing the
solvency requirement as well as the importance of this requirement being strictly
adhered to. To date, the proposals have yet to be implemented and, therefore, the
reliance on the old law remains.
Other jurisdictions also acknowledge that company‟s solvency is more befitting to
protect creditors but have not gone so as far as to abolish the capital maintenance
doctrine. The UK 104 retained the statutory provisions 105 which protect creditors‟
interests, with an additional requirement of directors‟ solvency
declaration/statements. It combines both the solvency requirement and capital
maintenance doctrine. The statute requires directors to make a solvency statement 106
100 Ibid, at [1.20], currently the test applicable is the cash flow test - see Regulation 18A(2)(a) of the
Companies Regulation 1966 which states: “A company shall be deemed to be solvent if it is able to
continue to meet its obligations as and when they become due without any substantial disposition of
its assets outside the ordinary course of its business, restructuring its debts, externally forced
revisions of its operations or other similar actions."
101 Ibid, at [1.9], In share buy back, declaration of solvency by a majority of directors is sufficient
because there is no other alternative procedure a company can to opt for, therefore the CLRC
viewed that the procedures should be lenient compared to reduction of capital situation see at [2.4].
102 Ibid, at [1.5]. The CLRC also proposed that court‟s approval to reduce company‟s capital is
necessary to be retained because it provides certainty and legality to the process.
103 Ibid, at[1.20(g)-(h)].
104 The UK must also comply with the EU Directives on these matters.
105 Refers to reduction of capital, share buy back, financial assistance and dividend payments.
106 The solvency statement requires each director‟s opinion in regard to the company‟s situation at the
date of the statement and that if the company is wound up within a year from the date of the
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