A company wanted to distribute a cash dividend by way of distribution of funds in its treasury and offset debts of the parent company, all while reducing its capital beyond the existing retained earnings distributable by law. The Court required the company to provide an opinion by an expert in the field of economics analyzing the economic situation and the company's financial position, as well as its ability to repay all its debts and fulfill all its obligations even after the requested distribution, approval of the secured creditors of the company (two banks), written guarantee of the directors as to the correctness of the representations and position of the Tax Authority and the Official Receiver. The company also published a newspaper ad to creditors of its intention.
The Court held that distribution despite failure to meet the profit test requires review whether it is reasonable to believe that the capital reduction will not prevent the company's ability to duly pay its existing and expected obligations - a liquidity test. The test is one of reasonableness and does not require absolute certainty. Therefore, the Court allowed the company to carry out the distribution within two months, after which, if distribution is not made within such time, re-approval of the court will be required.