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ACCA Applied Skills · Corporate and Business Law (Global) · Share capital

Halvorsen Ltd, a private company, passes a special resolution to reduce its share capital, supported by a directors' solvency statement, in a jurisdiction that allows reduction without court approval. Six months later the company becomes insolvent. Which statement is most accurate?

Directors who made the solvency statement without reasonable grounds may be liable. The reduction is not void merely because insolvency follows, but the statement must reflect an honest, reasonable view of the company's ability to pay its debts, which is the creditor safeguard replacing court approval.

  1. AThe reduction is automatically void, since any later insolvency invalidates it
  2. BDirectors who made the solvency statement without reasonable grounds may face liability, because the statement must be an honest and reasonable assessment of the company's ability to pay its debtsCorrect
  3. COnly shareholders who voted for the reduction can be held liable, as directors act as agents

Explanation

Where a solvency statement replaces court approval, directors must have reasonable grounds for their opinion that the company can pay its debts. Later insolvency does not by itself void the reduction, but directors lacking reasonable grounds can face liability. Directors are not shielded merely because they act as agents.

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