A private technology company wanted to distribute dividends to its employees, who are also its main shareholders. The Company can meet its liabilities for the short-term, but the dividend distribution raises concerns about the ability to repay its long-term liabilities.
The District Court approved the dividend's distribution and held that in order to distribute a dividend, it is required to do so out of the company's profits only, and only when there is no reasonable concern that the distribution will prevent the Company from meeting its existing and expected obligations when the time comes. However, when dealing with sophisticated creditors who can assess the chances and risks that the company will not be able to repay the debt they have provided them, as long as these creditors agree to the distribution, the Court will allow it.