Declaration of Solvency: What Directors Need to Know

The declaration confirms that the directors:

• have made a full enquiry into the company’s affairs;
• believe the company can pay its debts in full;
• have taken applicable interest into account; and
• believe payment can be made within a period not exceeding 12 months from the commencement of the winding-up.

It must also include a statement of the company’s assets and liabilities as at the latest practicable date before the declaration is made.

This means directors should consider more than obvious trade creditors.

Potential liabilities can include:

• Corporation Tax;
• VAT and PAYE;
• outstanding supplier balances;
• loans and finance agreements;
• employee liabilities;
• contractual obligations;
• professional fees;
• disputed claims; and
• contingent or potential liabilities.

The purpose is to establish whether the company can genuinely meet everything it owes within the required period.

The directors must believe the company will be able to pay its debts in full, together with applicable interest, within no more than 12 months from the start of the winding-up.

This is an important distinction.

It is not enough for the company simply to have assets worth more than its liabilities on paper if those debts cannot actually be paid within the required period.

Directors should therefore consider:

• when company assets can realistically be realised;
• when creditors need to be paid;
• potential tax liabilities;
• disputed or contingent debts; and
• whether sufficient cash will be available to meet liabilities and interest.

Recent guidance following the Novalpina judgment has reinforced the importance of the 12-month payment requirement.

If there is uncertainty over whether all liabilities can be settled within that period, this should be discussed with the proposed insolvency practitioner before the declaration is made.

Before making the declaration, directors should make sure they have an accurate and up-to-date picture of the company’s finances.

This will commonly involve reviewing:

• recent management accounts;
• bank balances;
• creditor balances;
• tax liabilities;
• outstanding invoices owed to the company;
• company assets;
• employee or director balances;
• contracts and guarantees; and
• any possible claims against the company.

Where there is uncertainty over a liability, directors should not simply ignore it because it has not yet become payable.

The proposed insolvency practitioner and the company’s accountant can help identify information that needs to be resolved before the MVL begins.

Once the declaration has been made, the shareholders can proceed with the decision to voluntarily wind up the company.

The broad sequence is:

1. The directors make the Declaration of Solvency.
2. Shareholders pass the winding-up resolution.
3. A licensed insolvency practitioner is appointed as liquidator.
4. The liquidator takes control of the winding-up.
5. Company liabilities are settled or appropriately dealt with.
6. Remaining assets are distributed to shareholders.

For the complete procedure, read our Members Voluntary Liquidation process.

If you’re considering closing a solvent limited company, Business Helpline can explain the MVL process and the information directors will need before proceeding.

Our initial advice is free, confidential and unbiased.

We can help you understand:

• whether the company appears suitable for an MVL;
• what the Declaration of Solvency involves;
• how the liquidation process works;
• likely professional costs; and
• what happens if there is uncertainty over the company’s solvency.

Call our free 24-hour helpline on 0800 088 2142 or request a confidential call back.