What Is the Solvency Test and When Must Directors Apply It?

The solvency test is the yardstick the Companies Act 2001 uses to decide whether a company may hand value back to its shareholders. If you are searching for the solvency test in Mauritius, the short answer is this: the board must be satisfied, on reasonable grounds, that the company is able to meet its liabilities both now and in the near future, and several important transactions are lawful only if it is.

This page explains the two limbs of the test, the operations that call for it, what the directors' certificate says and what happens when the test is applied carelessly. It does not walk through the whole dividend procedure; for that, see paying a dividend from a Mauritius company.

What the solvency test actually measures

The test has two limbs, and a company must satisfy both. Passing one is not enough.

Limb one: the cash-flow limb

The company must be able to pay its debts as they fall due in the normal course of business. This is a forward-looking question about liquidity. A company can own valuable property and still fail this limb if its bills are due before it can turn that property into cash.

Limb two: the balance-sheet limb

The value of the company's assets must be greater than the value of its liabilities, including contingent liabilities. Contingent liabilities are obligations that may arise depending on a future event: a guarantee given to a bank, a pending claim, a warranty. They count even though no money is owed today.

Why both limbs matter

A healthy-looking profit and loss account does not settle the matter. A company that has just paid a large dividend may be profitable on paper and still unable to meet next month's payroll.

Which operations call for the test

The Act ties the test to operations that move value from the company to its shareholders or that affect the capital protecting creditors. The exact conditions differ from one operation to another, so the table below is a map, not a substitute for reading the relevant provisions or taking advice.

The pattern is consistent: whenever the company's resources could be diminished for the benefit of its owners, the law asks the directors to look at creditors first.

Distributions in particular

A distribution is wider than a dividend declared in cash. Transferring an asset to a shareholder, or paying money to a shareholder in a way that is not a normal commercial exchange, can be a distribution. This is why a large management fee or an unusually generous loan to a shareholder may attract questions. For loans specifically, loans between a company and its directors covers the related rules.

The test is applied at the time of the decision, and the directors must be satisfied that the company will still pass it once the payment has been made. Approving a dividend on the strength of last year's accounts alone, without looking at what has happened since, is a frequent weakness.

A decision path for directors

The diagram below gives a simplified path. It is a thinking aid, not legal advice, and a real decision needs the facts of the company in front of the board.

The directors' certificate

Where the Act requires the directors to certify solvency, the certificate is a short written statement signed by the directors. In substance it says that, in the opinion of the signatories, the company satisfies the solvency test, and it gives the reasons for that opinion.

What a good certificate contains

• The operation being approved, described precisely.
• The date at which solvency is assessed.
• A statement that both limbs are met.
• The grounds for the opinion, referring to the documents the board relied on.
• The names and signatures of the directors who approve it.

The evidence behind the signature

The certificate is only as good as the material beneath it. Boards usually assemble:

• recent financial statements, or management accounts if the year-end accounts are out of date;
• a cash-flow forecast covering the period that follows the payment;
• a list of guarantees, litigation and other contingent items;
• the loan agreements and any covenants that restrict distributions;
• the bookkeeping records that support the figures, as described in bookkeeping requirements for a Mauritius company.

Keep these papers with the minute or resolution. If the decision is questioned later, the file shows what the directors knew and when. Board and written resolutions explains how to record the decision itself.

Who signs

The Act speaks of the directors, and the safe practice is for every director to review the evidence and to sign only if personally satisfied. A director who relies on someone else's work should still ask enough questions to form their own view. The general duty of care and diligence is discussed in directors' duties under Mauritian company law.

Practical steps before approving a payment

Using a repeatable routine makes the test far less burdensome than it first appears.

• Identify exactly which operation is proposed and who benefits
• Obtain up-to-date figures rather than relying on the last annual accounts
• Prepare a forward cash-flow forecast that includes the proposed payment
• List contingent liabilities, including guarantees and pending claims
• Check any lender or contractual restrictions on distributions
• Hold the board meeting or circulate the written resolution with the evidence attached
• Sign the certificate only when each director is satisfied
• File the certificate and the supporting papers with the company records

Companies that distribute profits regularly often fold this routine into their yearly calendar. The compliance calendar shows where such steps tend to sit, and the annual compliance checklist can be adapted to include a solvency review.

Common mistakes

Treating retained profit as spare cash. Profit is an accounting result. Cash may already be committed to tax, suppliers or investment.

Ignoring contingent liabilities. A guarantee for a related company can tip the balance-sheet limb even though nothing has been called.

Applying the test only once. If a dividend is declared and paid some time later, circumstances may have changed. The directors should be satisfied when it matters, not only when the idea was first discussed.

Signing without evidence. A certificate with no supporting file is a weak defence.

Forgetting shareholder-director dealings. Payments to a shareholder who is also a director can be mislabelled as salary or fees. How to remunerate a director correctly is covered in paying a director properly.

What follows if the test is not met

The consequences of a distribution made when the company fails the test can be serious. Depending on the circumstances, directors who authorised it may face personal liability to the company, and shareholders who received the money with knowledge of the position may be asked to return it. A liquidator in a later insolvency will usually examine recent distributions. For the wider picture on exposure, see the liability of a resident director and penalties for non-compliance in Mauritius.

How far these consequences apply to a particular director depends on what they knew, what they relied on and the terms of the company's constitution. Those questions call for individual analysis.

Where this fits in company life

The solvency test is not a separate filing; it is a decision discipline that sits inside the board's normal work. It links the accounts, the board record and the statutory books. A well-kept set of statutory registers and a clear paper trail make each certificate easier to defend. For the broader framework, start from corporate compliance in Mauritius.

If you would like a licensed professional to look at a specific proposed payment, you can send a request through the site's form. It is relayed to an FSC-licensed corporate service provider (Management Licence).