What do directors need to know

There are three parts to the full declaration of solvency document:

  • A statement of assets and liabilities.
  • The sworn declaration of solvency.
  • The endorsement of the proposed liquidator.

The declaration of solvency must give confirmation of the company’s financial position no earlier than 5 weeks before the winding up resolution is to be made by the shareholders of the company. In practice, where the members meeting is held at short notice, the declaration of solvency will generally be made the same week. Alternatively, it can be even earlier in the same day.

Statement of assets and liabilities

The statement of assets and liabilities, essentially, sets out the company’s financial position ahead of entering solvent liquidation. Details of the remaining assets in the company less any outstanding creditor balances are listed.

Unlike the statement of affairs, the statement of assets and liabilities also sets out the estimated costs of the solvent liquidation and any interest which will be due to creditors. This gives the shareholders a better picture of their likely return once the capital distribution becomes available.

Sworn declaration of solvency

In comparison to a statement of affairs, which is supported by a statement of truth, the declaration of solvency must be sworn before a solicitor or notary. This adds additional implications if there are inaccuracies in the declaration of solvency. This will be covered later in this article. The declaration of solvency must be sworn by:

  • All directors where there are 2 or less.
  • The majority of directors where there are more than 2.

The solicitor or notary will generally charge around £10 per swear on the declaration of solvency. The wording of the declaration of solvency must comply with the insolvency legislation and declare as follows:

“We being all / majority of the directors of the company do solemnly and sincerely declare that we have made a full enquiry into the affairs of this company, and that, having done so, we have formed the opinion that this company will be able to pay its debts in full together with interest at the official rate within a period of 12 months, from the commencement of the winding up.”

Endorsement of the proposed liquidator

Once the company has submitted the declaration of solvency to the proposed liquidator to present to the shareholders of the company, resolutions can then be passed for the company to enter solvent liquidation. The liquidator will then endorse the document. The same will also be published at companies house on the official record.

From here, the assets of the company can be realised and any remaining creditors paid in full with interest from these proceeds. The balance will then be paid to shareholders, by way of a capital distribution relative to their shareholding. At this point, any eligible shareholders can then claim entrepreneurs relief to reduce their own tax burden on this distribution.

Consequences of a false declaration of solvency

The repercussions of a false declaration of solvency are extremely severe. You should, therefore, only proceed with the solvent liquidation after receiving advice from a licensed insolvency practitioner. If it turns out the company is actually insolvent, the possible consequences are:

It should also be noted that a false declaration of solvency is also a criminal offence. In the most severe cases, this may result in imprisonment for up to two years, a fine or both.

Whilst the allure of a capital distribution to then claim entrepreneurs relief to deal with the final funds within the company may be tempting, you must be certain the company is solvent and nothing is going to come back to bite you. Some common things which may arise include:

  • Personal injury claim following a health and safety breach.
  • Wrongful dismissal claims from former employees.
  • Warranty claims for faulty goods.
  • Negligence claims in relation to advice or services provided by the company.

It is often possible to insure against a number of these claims, but you should be aware of these when deciding the company is to enter solvent liquidation and ensure appropriate cover is in place.

If you are considering placing your company into members voluntary liquidation in order to claim the benefits of entrepreneurs relief, our BusinessRescueExperts can take you through the steps and ensure you are signing off a true declaration of solvency.