Distribution of dividends when the company doesn’t stand up to the profit test

As is well known, a company that wishes to distribute dividends may do so out of its profits, provided that it meets its existing and expected obligations. The Israeli Companies Law prescribes complex tests for the ability to distribute a dividend called the "profit test" and the "solvency test". In certain cases, the Company does not meet these criteria (for example, when adjusting for inflation causes the company's equity to be inflated or when it is a young company that already has large profits), the company still wants to distribute a dividend. Is it still possible to distribute a dividend?
The Companies Law does not leave a company that does not meet the prima facie profit test in a state of no solution and determines that the Court may approve a distribution that does not meet the profit test, provided that it is satisfied that the repayment ability test is in place.
In a series of judgments, it was determined that the solvency test, which is a broad economic test, is intended to enable examination of the question of whether there is reasonable concern, inter alia, by examining the Company's cash flow, that the distribution of the dividend will prevent the Company from meeting its existing and expected obligations. In the meantime, the solvency test is a forward-looking probability test and does not require absolute certainty that examines the existence or absence of a reasonable risk of non-compliance with a company's obligations as a result of the distribution of a dividend that does not meet the profit test under the Companies Law - Repayment following capital reduction.
The Court is required to examine a request to approve distribution based on economic and business indices regarding the state of the company, taking into account its creditors' interests. In the event that the Court believes, on the basis of the data presented to it, including an economic opinion regarding the condition of the requesting company on behalf of an authorized and independent entity, that the approval of the requested distribution does not impair the company's ability and ability to repay and fulfill all its existing and expected obligations and obligations, it will accept the application and approve the requested distribution.
Thus, even a company that does not meet the profit test may, in certain cases, distribute a dividend but it is important first to consult with an attorney and to build the application well in Court. In any case, prior to any dividend distribution is important to consult with an attorney and accountant to verify the legality of the proposed division.