A declaration of solvency is a formal statement made by the director(s) of a company effectively demonstrating that the company is “solvent,” so that the company can be placed into a Members’ Voluntary Liquidation.
The document states that the company can pay back its debts to creditors in full, typically within 12 months of the liquidation process beginning. To accompany the declaration, a summary of the Company’s financial position will need to be compiled, using financial information such as balance sheets and cash flow forecasts to evidence that the company is solvent and facilitate the voluntary liquidation process.
It is important to note that a Declaration of Solvency is a legal document which must be sworn before a Notary or solicitor and will be filed with the Registrar of Companies. Directors making a false or misleading declaration can potentially face criminal sanctions and can have serious consequences for the individuals concerned.
Why Do I Need a Declaration of Solvency?
A declaration of solvency is needed for several reasons, principally because it is a legal requirement to confirm that the company is solvent before it can proceed into Members’ Voluntary Liquidation.
The declaration can also assure stakeholders that you can meet your financial obligations, including repaying all outstanding debts. It will also provide shareholders with an indication of the value of the assets/cash they will receive from the liquidation process.
Consequences of Not Having a Declaration of Solvency
Without a declaration, you cannot enter your business into Members’ Voluntary Liquidation. Therefore, if you wish to wind down your business without a declaration of solvency, the only option may be to place the business into insolvent liquidation, which will have significant consequences for the directors.
What Happens If I Declare Solvency and Later Discover My Company Is Insolvent?
If you have declared solvency and later find out that your company is insolvent, this can lead to several serious consequences. You may be subject to monetary fines, a disqualification from acting as a director, and in more severe circumstances, a prison sentence.
This is why it is vital that you do an in-depth assessment of your company’s financial situation before you declare your company as solvent. Failing to fulfil a thorough investigation and declaring your company as solvent, could see you breaching your legal duties as director.
If you find yourself in a situation where your company’s financial position has changed from solvent to insolvent, you should address the problem quickly to mitigate potential legal and financial repercussions:
Professional Advice: Consult with both legal and financial advisors, who will be able to help you understand your situation, and the options available to you.
Act Promptly: Once you have sought advice from professionals, it is important to act as soon as possible. This will help to minimise the risks and demonstrate that you are acting in good faith.
Open and Honest: It is essential to be transparent with stakeholders about the change in your company’s situation. Ensure you discuss any implications your insolvency may have about their repayment.
Keep a Record of Everything: Keep thorough documentation of your actions and communications throughout the process. This can help protect you from potential liability for the debts owed to creditors down the line.
