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It is important to distinguish as to when company liquidity is relevant for the purpose
of winding up and also for the purpose of distribution envisaged in section 4 of the
New Zealand Companies Act 1993. The consequences which depend on the winding
up order mentioned above were based on directors‟ past action i.e. whether the
transaction was made during the time the company was insolvent. 26 In contrast,
section 4 places the burden on directors to forecast the company‟s solvency and to
remain cautious in their decisions. 27 It is a difficult task for directors because there
are many factors which may affect the company‟s solvency, both within and beyond
their control. 28 As such, directors have referred to companies‟ current financial
statements in order to project the company‟s solvency. 29
8.5 Balance Sheet Test
The balance sheet test provides that the company is insolvent if its liabilities exceed
its assets or if its assets are insufficient to meet the liabilities and in doing so the
company‟s contingent and prospective liabilities is to be taken into account. 30 The
term liabilities is broader than the term debts and it includes all forms of liability,
whether liquidated or unliquidated and whether arising in contract or in tort or by
way of restitution or for damages for breach of statutory duty. 31
Goode pointed out that, in order to give the phrase contingent liability any meaning,
it must be restricted to liability or loss arising out of existing obligations which
26 Ibid, at 72.
27 Ibid.
28 Ibid, at 72-76.
29 Ibid.
30 Goode above n3 at [4-24] 101. New Zealand, the UK and Malaysia share the same term in
legislations.
31 Ibid, at [4-25]; see also r13.12(4) of the UK Insolvency Rules 1985 for the purpose of winding up.
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