Lynas continuous disclosure, page-3

Directors have an obligation to review and assess a company’s solvency throughout the year, not just at year end/half yearly reporting dates or when signing solvency resolutions. Solvency determinations are therefore a day-to-day matter for management and directors to manage. In connection with the question of insolvency generally and whether a company is solvent, directors may find the following comments from Palmer J in Hall v. Poolman (2007) helpful: There is sometimes no clear dividing line between solvency and insolvency from the perspective of the directors of a trading company which is in difficulties. There is a difference between temporary illiquidity and “an endemic shortage of working capital whereby liquidity can only be restored by a successful outcome of business ventures in which the existing working capital has been deployed.”...The first is an embarrassment, the second is a disaster. It is easy enough to tell the difference in hindsight, when the company has either weathered the storm or foundered with all hands; sometimes it is not so easy when the company is still contending with the waves. Lack of liquidity is not conclusive of insolvency, neither is availability of assets conclusive of solvency.... Where a company has assets which, if realised, will pay outstanding debts and will enable debts incurred during the period of realisation to be paid as they fall due, the critical question for solvency is: how soon will the proceeds of realisation be available...As a very broad general rule, a director would be justified in “expecting solvency” if an asset could be realised to pay accrued and future creditors in full within about 90 days.... The position becomes murkier the less certain are the outcomes e.g.: the market value of the asset may not be ascertainable until the market is tested, so that it is not certain that the realisation will pay in full both existing debts and those to be accrued during the realisation period. The time at which the proceeds of realisation become available may depend upon the state of the market and the complexity of the transaction. There comes a point where the reasonable director must inform himself or herself as fully as possible of all relevant facts and then ask himself or herself and the other directors: “How sure are we that this asset can be turned into cash to pay all our debts, present and to be incurred, within 3 months? Is that outcome certain, probable, more likely than not, possible with a bit of luck, possible with a lot of luck, remote, or is there is no real way of knowing?” If the honest and reasonable answer is “certain” or “probable”, the director can have a reasonable expectation of solvency. If the honest and reasonable answer is anywhere from “possible” to “no way of knowing”, the director can have no reasonable expectation of solvency. If the honest and reasonable answer is “more likely than not”, the director runs the risk that a court will hold to the contrary in an insolvent trading claim. If the honest and reasonable answer is “no way of knowing yet, we need more information”, the director must then ask: “How long before we have the information so that we can give a final answer?” If the honest and reasonable answer to that question is: “By a definite date which will not extend the realisation period (if there is to be one) beyond 3 months”, the director may reasonably say: “Let’s wait until then before deciding”. If the honest and reasonable answer is “there is no way of knowing yet when we will have the information to make a decision”, the director must say: “Then there is no way that we can now have a reasonable expectation of solvency and there is no way we can reasonably justify continuing to trade without knowing when we will know whether the company is insolvent. Call the administrators”. By this series of questions and answers I do not mean to lay down some pro forma test of directors’ liability for insolvent trading. Each case depends on its particular facts. These questions and answers merely serve to illustrate that when a company is struggling to pay its debts, the directors must face up to the issue of insolvent trading directly and with brutal honesty: they must not shirk from asking themselves the hard questions and from acting resolutely in accordance with the honest answers to those questions. Quoted from http://www.auasb.gov.au/admin/file/content102/c3/going_concern_issues_in_financial_reporting.pdf