In the Companies Act, the legality of the distribution of assets is on one hand connected to the distributable profits shown in the balance sheet and on the other hand to the solvency of the company. In addition, the distribution of assets should be based on validated and audited financial statements. This blog post will examine the solvency test, the definition and interpretation of which has proved to be particularly difficult, because the wording of the section, the government bill and case law do not directly provide clarity on what the solvency test means and how it should be carried out.
According to chapter 13, section 2, of the Companies Act, assets shall not be distributed if it is known or should be known at the time of the distribution decision that the company is insolvent or that the distribution will cause insolvency of the company. This section is commonly referred to as the solvency test. In the section, the distribution of assets is tied to the continued solvency of the company, that is, the company must be able to meet its obligations even after the distribution of assets.
The solvency test applies to any distribution of assets, not only to the distribution of dividends or assets from reserves of unrestricted equity. This provision is applicable, for example, when the company acquires or redeems its own shares or reduces its share capital. However, the provision does not apply when the company is being dissolved.