What is a declaration of solvency?

A declaration of solvency is a crucial legal document that requires the majority of the company’s directors to sign before initiating a Members’ Voluntary Liquidation. This declaration confirms that the company is financially stable, capable of settling all outstanding debts (including statutory interest) to creditors within 12 months from the start of the liquidation process.

What does a solvency declaration entail in a Members’ Voluntary Liquidation (MVL) process?

A declaration of solvency is a necessary document in the formal solvent liquidation process known as a Members’ Voluntary Liquidation (MVL).

In MVLs, it’s crucial to understand that this method of closing a company is reserved for solvent companies. Therefore, directors must affirm their company’s solvency by signing a declaration of solvency. This confirms that the company can settle its outstanding liabilities (including statutory interest) within a maximum period of 12 months after the start of the liquidation.

When is it necessary for me to execute a solvency declaration?

The declaration of solvency is signed just before the formal initiation of the MVL. This sworn declaration of solvency must be supported by a document called a statement of assets and liabilities, detailing the company’s financial standing.

What does a statement of assets and liabilities entail?

While resembling a Statement of Affairs (SOA) used in insolvent liquidations, a statement of assets and liabilities varies by incorporating the expenses of the liquidation process and any interest owed to creditors in its assessments. This comprehensive approach provides shareholders with a more accurate estimate of the probable capital distribution amount.

Who is required to endorse a solvency declaration?

The declaration of solvency is affirmed by the directors of the company. If there are only one or two directors, then all must sign; if there are more than two directors, a majority must sign the declaration. The swearing of the declaration must be witnessed by a notary or solicitor, who typically charges a small fee for this service, usually a set cost per signatory.

What are the consequences if I sign a solvency declaration but subsequently discover that my company is, in fact, insolvent?

Signing a declaration of solvency falsely, whether knowingly or not, constitutes a criminal offence and can result in severe penalties, including fines, disqualification from future directorship roles, or imprisonment in serious cases. It is therefore crucial to meticulously assess your company’s financial standing before affirming its solvency.

While you may be confident in meeting obligations to HMRC and having no outstanding trade creditors, it’s essential to consider potential creditors emerging after company closure. These could include employee claims for redundancy and statutory entitlements like notice pay. Additionally, contingent liabilities such as ongoing legal action should be taken into account.

When evaluating the feasibility of an MVL for your company, seeking advice from a licensed insolvency practitioner right from the planning stage is highly recommended. They can not only guide you through the process but also confirm if your company qualifies for an MVL and if it’s the most suitable method for closure based on its financial status.

What steps should I take if my company is facing insolvency?

If your company is insolvent, meaning its liabilities surpass its assets or it can’t meet its financial obligations as they become due, you’ll need to explore an alternative insolvency procedure such as a Creditors’ Voluntary Liquidation (CVL). This allows for the closure of your company while addressing its outstanding debts. Similar to an MVL, a CVL requires the guidance of a licensed insolvency practitioner.

If you’re contemplating liquidating your solvent company through an MVL, reach out to the experts at Vanguard Insolvency. With over 70 licensed insolvency practitioners and more than 100 offices across the UK, we’re well-equipped to assist you. Whether you’re in the planning phase or ready to proceed with an MVL, contact us today for free, no-obligation assistance and advice.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.