If a company wants to enter into solvent liquidation, a declaration of solvency must be submitted, which is similar to statement of affairs that’s given for creditors voluntary liquidation. In this post, we will discuss what declaration of solvency means for the company and the consequences of such a declaration.
Things included in declaration of solvency
The full declaration of solvency contains three parts (discussed below)
- Statement of assets and liabilities. This is more like an outline of the company’s financial situation before entering solvent liquidation. Please note that declaration of solvency must talk of the company’s financial position no earlier than five weeks of winding up resolution. In practice, the declaration of solvency is usually made in the same week as the meeting of members. Unlike statement of affairs, this statement lists out the remaining assets of the company after deducting principle and interest due to creditors, with cost of solvent liquidation. This also offers a better picture to shareholders of likely return, once the time comes for capital distribution.
- Sworn declaration of solvency. The declaration of solvency must be sworn by the directors before a notary or solicitor. This adds up additional implications, if there are any inaccuracies in declaration of solvency. This must be sworn by all directors, if the number of directors is two or less, or by majority, if directors are more than two. The solicitor/notary generally charges a few, and the proper format must be followed.
- Endorsement of the proposed liquidator. Resolutions for entering solvent liquidation can be passed once the declaration of solvency has been submitted to proposed liquidator, and it will be also published at companies house for record.
Here on, assets of the company can be sold off, creditors will be paid in full with all due interests. The balance will be distributed among shareholders based on their shareholding. Eligible shareholders can claim entrepreneurs relief at this point to reduce tax burden.
Knowing the repercussions of false declaration of solvency
Please note that false declaration of solvency is a criminal offence, which can have fine, imprisonment or both. If the company turns out to be solvent, the company will be placed in creditors voluntary liquidation, while you may face disqualification as a director. Any funds received by you and other directors must be repaid to the company. It is more than important for directors to be sure that the company is solvent and nothing has been ignored. Think of situations like personal injury claims, wrong dismissal claims, warranty claims and negligence claims. These claims must be evaluated, checked, and attended to, before entering solvent liquidation. Directors, in particular, seek professional assistance on all aspects before taking the leap. Keep in mind that the whole idea of liquidation and making a claim for entrepreneurs relief may seem tempting, but often things can spiral out of control, even with smaller issues.
If you are considering members voluntary liquidation, contact the best business rescue experts to know the steps and avoid common mistakes, which may have severe consequences.