What is a Declaration of Solvency?

By June 30, 2022Tips & Advice
Declaration of Solvency

A Statutory Declaration of Solvency [the Declaration] is a key document in the liquidation process for a Members’ Voluntary Liquidation [MVL]. An MVL is a solvent liquidation procedure where, from the outset, it is envisaged that all creditors will be paid in full.

Prior to the passing of the Special Resolution by the Shareholders to place the company into liquidation, both directors [if there are only 2] or a majority of directors [if there are more than 2] must declare before a solicitor the Declaration stating that the directors have made a full enquiry into the affairs of the company and are satisfied that it will be able to settle all its debts [together
with Statutory Interest at 8% per annum payable to outstanding creditors] within 12 months of the commencement of the MVL. Under the Insolvency Act 1986 [the Act] it is a criminal offence for a company director to make a statutory declaration of a company’s solvency without reasonable grounds.

Where one or more of the directors is based overseas, the Declaration usually takes place before a Notary Public.

The actual form and content of the Declaration is governed by the rules of the Statutory Declarations Act 1835 [the SDA].

The relevant law is found at Section 89 of the Act.

The Declaration has no effect unless:

  • It is made within the 5 weeks immediately before the date that the Special Resolution to place the company into liquidation is passed
  • It embodies a statement of the company’s assets and liabilities as at the latest practicable date before the making of the Declaration-i.e. a date not more than 5 weeks before the passing of the Special Resolution
  • It must be delivered to the Registrar of Companies before the expiration of 15 days following the passing of the Special Resolution

A director making the Declaration, without reasonable grounds for the opinion that the company will be able to pay its debts in full, together with Statutory Interest, within the period specified, is liable to imprisonment of up to 2 years or a fine, or both.

The legal presumption, in a case where the company’s debts and Statutory Interest are not paid or provided for in full, is that the director did not have reasonable grounds for his opinion, unless the contrary can be shown. The burden of proof, therefore is on the director to prove that his/her view regarding solvency was reasonable, not upon the Liquidator or creditor to prove that it was unreasonable.

If the Declaration is not delivered up to the Registrar of Companies within the 15 days as outlined above, the company and every officer in default is liable to a fine, and for continued contravention a daily default fine.

Accordingly, the Declaration is in effect a statement of truth and is not a document that directors should enter into lightly. A proper review of the assets and liabilities, including contingent and potential liabilities, must be undertaken prior to its finalisation.

When preparing the statement of assets and liabilities which forms part of the Declaration document, directors should make a proper investigation of potential claims against the company that may not be sitting on the company’s balance sheet e.g. warranty or guarantee claims, former lease covenants, employee claims for wrongful dismissal, personal injury claims.

The solicitor’s fee for attesting the Declaration of the director[s] is prescribed and nominal [approximately £10]. Historically, the Declaration was always made in person, by the director[s] before the solicitor, however, as a result of the Covid pandemic, the authorities accept that the Declaration can be done online by way of video conferencing/Zoom/Teams/ etc. The fee for utilising the online procedure will be much higher.

Whether online or in person, the solicitor will require to see evidence of identity from the director[s] before attesting the Declaration.

In conclusion

The primary aim of an MVL liquidation is to ensure that parties receive what they are entitled to in the order of priority as laid down by the prevailing legislation. It is the job of the Liquidator to make sure that such priority is respected. It is the job of the director[s] to ensure that a proper estimation of the company’s assets and liabilities is undertaken prior to liquidation and that the Declaration of Solvency accurately reflects the true Balance Sheet position at liquidation.

An MVL is largely driven by tax considerations and the narrative is controlled by the Shareholders.

Early professional advice should be sought from a Licensed Insolvency Practitioner to ensure the timely implementation of the liquidation process.

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