Before a company can enter solvent liquidation, it us important to give a declaration of solvency, which is almost similar to the statement of affairs that’s required for creditors voluntary liquidation. In this post, let’s understand what declaration of solvency means for the business with other aspects.
What does declaration of solvency contain?
The full document of declaration of solvency contains three important parts –
- A statement of assets and liabilities
- Declaration of solvency
- And endorsement of the proposed liquidator
It must be noted that the declaration of solvency must confirm on the financial position of the company no earlier than five weeks prior to winding up resolution to be made by shareholders. Practically speaking, the declaration of solvency is made in the same week when the members meeting is done. It can be made earlier as the same day of the meeting.
Statement of assets and liabilities
As the name implies, the Statement of assets and liabilities outlines the financial position of the company before entering solvent liquidation. All assets are listed, with details of leftover assets after deducting creditor payments. Unlike statement of affairs, statement also mentions the expected costs of solvent liquidation with interest due to creditors. For shareholders, the Statement of Assets and Liabilities is important because it offers an overview of likely return once capital distribution is available.
Sworn declaration of solvency
Sworn declaration of solvency must be sworn, as implied from the name, before a notary or solicitor. In case there are any accuracies in declaration of solvency, this just adds up the implications. The declaration of solvency must be sworn by all directors where there are just two or less, or by majority of directors, in case there are more than two.
The notary/ solicitor will charge a fee (usually £10 per swear) for the document. There is a proper format for declaration of solvency, which should be declared as required. It basically states that the company is in a position to repay debts with interest in full at official rate within a year of commencement of the winding up.
Endorsement of the proposed liquidator
Resolutions can be passed to enter solvent liquidation once the company has submitted declaration of solvency to the “proposed liquidator”. The proposed liquidator will endorse the document and will be published on official record at companies house.
Once all of that is done, the creditors will be paid from the sale and realization of assets, and the balance will be paid to shareholders as per their respective shareholding. Some of the eligible shareholders can seek entrepreneurs relief to reduce tax burden on this share.
Consequences of a false declaration of solvency
It is extremely important to take advice from a licensed insolvency practitioner for declaration of solvency, because false declaration comes with severe consequences. This includes placing the company into creditors voluntary liquidation and disqualification as a director. Please note that false declaration of solvency is a criminal offence, and there can be imprisonment, fine or both.
Talk to business rescue experts to know more on what you can do to avoid the common mistakes.