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What is a declaration of solvency?

A declaration of solvency is a legal document which must be signed by a majority of the directors of a company prior to it being placed into a Members' Voluntary Liquidation procedure. The declaration of solvency attests to the fact that the company is in a solvent position, and that any outstanding liabilities can be made in full to creditors (with statutory interest) within 12 months of the liquidation process commencing.

What is a declaration of solvency in a Members' Voluntary Liquidation (MVL) procedure?

A declaration of solvency is a document which must be signed as part of a formal solvent liquidation process known as a Members’ Voluntary Liquidation (MVL).

When it comes to MVLs, the important thing to remember is that this method of company closure is designed for solvent companies only. Due to this, directors are required to swear to their company’s solvent nature by signing a declaration of solvency. This verifies the fact that the company is in a position to settle its outstanding liabilities (along with statutory interest) within a maximum period of 12 months following the beginning of the liquidation.

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When do I need to sign a declaration of solvency?

A declaration of solvency is signed shortly before the MVL is formally initiated. The sworn declaration of solvency must also be accompanied by a document known as a statement of assets and liabilities which sets out the company’s financial position.

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What is a statement of assets and liabilities?

Although similar to a Statement of Affairs (SOA), which is prepared in insolvent liquidations, a statement of assets and liabilities differs in that it also includes the cost of the liquidation process plus any interest due to creditors in its calculations. This allows for a more complete picture giving shareholders a more accurate reflection of what the capital distribution amount is likely to be.

Who needs to sign a declaration of solvency?

A declaration of solvency is sworn by the directors of the company. If there are just one or two directors, then all are required to sign; for a company with more than two directors, a majority must sign the declaration. Swearing of the declaration must be witnessed by a notary or solicitor; they will charge a small fee for this service, typically a set cost per signatory.

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What happens if I sign a declaration of solvency but then later find out my company is actually insolvent?

Falsely signing a declaration of solvency, whether knowingly or not, is a criminal offence and is punishable by a fine, disqualification from acting as a director in the future, or even imprisonment in the most serious cases. Due to this it is vitally important that you carefully and thoroughly assess the financial position of your company before attesting to its solvency.

While you may be sure you have met your obligations to HMRC and that there are no outstanding trade creditors, you should consider whether there are any creditors which could arise following your company being closed. The most likely of these are employee claims for redundancy and associated statutory entitlements including notice pay. Contingent liabilities such as any ongoing legal action should also be factored into the calculation.

When considering the potential viability of an MVL for your company, liaising with a licensed insolvency practitioner from the initial planning stages is highly advisable. Not only will they be able to guide you through the process from start to finish, but they will also be in a position to confirm that your company qualifies for an MVL and that this is the most appropriate method for closing your company based on its financial position.

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What should I do if my company is insolvent?

If your company is insolvent – meaning its liabilities exceed its assets, or it cannot afford to meet its creditors and other outgoings as and when they fall due – you will need to consider an alternative insolvency procedure such as a Creditors’ Voluntary Liquidation (CVL). This will allow you to close your company while taking care of its outstanding debts in the process. Like with an MVL, a CVL can only be entered into under the professional guidance of a licensed insolvency practitioner.

If you are considering liquidating your solvent company by way of an MVL, contact the experts at Real Business Rescue. With over 70 licensed insolvency practitioners and more than 100 UK offices, we are perfectly placed to help. Whether you are in the planning stages, or are ready to action an MVL for your company, call us today for no-obligation help and advice.

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