Dividends can sometimes be distributed even when the profit test is not met

A company sought to distribute a dividend even though it did not have distributable profits and therefore applied to the court for approval.
The rule is that a company seeking to distribute a dividend must meet two preconditions: one, that the distribution be made from its profits (the profit test) and the other, that it be able to meet its existing and expected liabilities (the solvency test). This ensures that the dividend distribution will not be made "at the expense" of the company creditors.
The Court held that the "solvency test" is a broad test in which the liquidity of the company must be examined in addition to its accounting balance sheets and in examining the company's financial condition it must be based on economic and business indicators and the interest of creditors must also be taken into account.
Therefore, the Court approved the dividend distribution and ruled that since the company has no current operations and after the dividend distribution the company's cash balance will still be positive, there appears to be no risk of future loss or cash flow deficit that could impair the company's solvency.