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10.3.2.3 Reasonable Prospect/Predicting Company’s Solvency
The statute does not define or give guidelines as to what constitutes a „reasonable
prospect‟ as envisaged in section 214. The provision requires directors to predict
that the company‟s solvency will be affected as a result of their action. In
foreseeing the company‟s future, directors are required to be aware when the
company crosses the line from being solvent to having no prospect of
maintaining its solvency.
Therefore, the time of knowledge of the company becoming insolvent is
important because directors can be made personally liable once the line is
crossed. 129 As such, directors are supposed to be sensitive to the changing nature
of the company‟s position, for example by paying attention when the company
suffers losses and the causes for such losses. 130 It is essential to ascertain the
causes of such losses because it would determine whether remedial actions taken
by the directors are reasonable, based on the tests enunciated in section 214(4)
which will be discussed later in the chapter.
The Companies Act also requires the company to maintain and keep proper
accounts, 131 which will assist directors to keep track of the company‟s
solvency. 132 Directors are expected to have a basic knowledge of the accounting
records so that they will be able to detect any changes in the company‟s position
sooner. 133 The court however, is reluctant to impose knowledge on directors that
the company has „no reasonable prospect to avoid insolvent liquidation‟ too soon,
129 See also Keay above n2 at 93-94.
130 Oditah above n52 at 210; the writer identifies many causes of insolvency namely from loss of
major customers, the decline in the market demand for the output, mismanagement, economic
downturn or incompetency.
131 See Part 15 chapter 2 of the UK Companies Act 2006.
132 Cooke and Hicks above n64 at 342.
133 David Milman "Strategies for Regulating Managerial Performance in the 'Twilight Zone'-
Familiar Dilemmas: New Considerations” (2004) JBL 493 at 497.
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