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Definition

<p style="text-align: justify;">The ability of a <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">company</span> to pay its expected short-term <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">liabilities</span> out of its expected short-term <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">assets</span> and <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">income</span>s. With the introduction of the new <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">Companies Act</span> (71 of 2008) company law shifted from a doctrine of asset protection to a doctrine of <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">solvency</span> and <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">liquidity</span>. Whereas previously, the Act had been concerned to ensure that <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">dividend</span>s were paid only from <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">profits</span>, the emphasis is now on whether the company's solvency and liquidity is sufficient to afford the dividend. A company can be <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">profitable</span>, but <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">illiquid</span> - which can ultimately result in its <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">liquidation</span>. If all its profits are tied up in <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">working capital</span>, like stock (<span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">inventory</span>) and <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">debtors</span> then there might be insufficient cash to meet <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">current liabilities</span> on time. Before a dividend can be paid or the company can buy its own shares back the <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">directors</span> must sign a document to certify that the company is solvent.</p>