Question

You are not expected to cite case law but you must provide pinpoint references to the Companies Act 1993. (350-450 words) Background Gold Sport Ltd (Gold) is a leading supplier of sports equipment. Gold wishes to pay a dividend to its shareholders, but Ana Steel, Gold’s accountant, is concerned that a pending legal action may affect Gold’s solvency. In preparing her advice for the board, Ana notes that Brent Kēna, a well-known triathlete, has recently started legal proceedings against Gold. Brent claims that, by supplying a leaky kayak, Gold was in breach of contract and caused him $200,000 in damages when it sank during a race. Ana calculates that if Brent’s full claim were paid, Gold’s liabilities would just exceed the value of its assets (Gold has recently prepared financial statements as required by statute). Ana consults Carla Osmium, Gold’s solicitor, who advises her that the case against Gold has no more than an outside chance of succeeding.

Required

(a) Outline the test which applies to the payment of a dividend.

(b) Apply the test to Gold’s situation.

(c) Comment on the board’s ability to rely on Carla’s advice.

Answer 1

Solvency of Gold Sport Ltd (Gold)

In the specified case of Golod Sport Ltd mentioned that the company is a leading supplier of sports equipment and wishes to pay a dividend to its shareholders, but Ana Steel, Gold’s accountant, is concerned that a pending legal action may affect Gold’s solvency. Ana Steel notes that,Brent Kēna, a well-known triathlete, has recently started legal proceedings against Gold. Brent claims that, by supplying a leaky kayak, Gold was in breach of contract and caused him $200,000 in damages when it sank during a race so Ana Steel calculates that if Brent’s full claim were paid, Gold’s liabilities would just exceed the value of its assets (Gold has recently prepared financial statements as required by statute).Based the matter am answering the asked question in this problem.

(a) Outline the test which applies to the payment of a dividend.

The test for paying a dividend under the legislation is clear, in that the Directors can only pay a dividend if the company will still be solvent immediately after the payment is made. Keep in mind that if the dividend is only credited to the shareholders’ current account(s), no payment has actually been made. Meaning that when there is a delay between declaring a dividend and actually paying it, the solvency test needs to be met on both occasions.The Companies Act 1993 provides three tests to determine if a dividend can be paid:,1) the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and,2) the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and,3)the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

(b) Apply the test to Gold’s situation.

From the problem it is noted that,Mr. Brent Kēna, a well-known triathlete, has recently started legal proceedings against Gold. Brent claims that, by supplying a leaky kayak, Gold was in breach of contract and caused him $200,000 in damages when it sank during a race. Ana calculates that if Brent’s full claim were paid, Gold’s liabilities would just exceed the value of its assets .Unde rhe solvency test of the Companies Law, the directors must also have regard to their duties under that law and under customary law to act with a view to the best interests of the company. If the company authorises a payment of dividend that is a distribution for the purposes of the Companies Law, in breach of this duties and without considering the best interests of the company, the company personally liable to repay the amount to the shareholders and dividends and distributions come in a number of forms and different considerations apply to the different forms.Here Gold Sport company may proceeds with the declaring and distribution of dividend with regards the Companies Act 1993.

(c) Comment on the board’s ability to rely on Carla’s advice.

The advices of Carla's with regards the case against Gold Sports Ltd.has no more than an outside chance of succeeding.Carla Osmium, Gold’s solicitor who advises Ana steel in the respective case between Gold Sports ltd V/s. Brent Kēna.While the requirement for a declaration of solvency before a payment can be made applies to dividends of every sort, the Companies Law does not otherwise set out detailed corporate procedures or mechanisms for making these payments.If a declaration and distribution of dividend are made in contravention of the law, it is possible to apply to the Court for an order that the declaration and distribution are to be treated as if it had been made in accordance with the law and wish to apply for such a court order so that the position may be regularised.