What is a Declaration of Solvency and who needs to sign it?
A Members’ Voluntary Liquidation (MVL) is a company closure method for solvent businesses that can pay all their debts. As part of the process, the directors must sign a legal document called a Declaration of Solvency to verify the company’s financial position.
Signing a Declaration of Solvency falsely is a criminal offence that can lead to serious consequences for company directors. That’s why it’s important to understand what a Declaration of Solvency is, what it means and the part it plays in the Members’ Voluntary Liquidation process.
What happens during a Members’ Voluntary Liquidation?
Licensed insolvency practitioners appointed – A letter of engagement is signed, formally appointing a licensed insolvency practitioner to act as liquidator and advise you throughout the Members’ Voluntary Liquidation process.
Declaration of solvency signed – The declaration of insolvency is a legal document that must be signed to testify that your business is solvent, and therefore, able to settle liabilities in full within 12 months of the liquidation commencing, including interest, with enough funds remaining.
General meeting of shareholders held – A general meeting is held to allow shareholders to vote in favour or against the Members’ Voluntary Liquidation proposal. If 75% of shareholders vote in favour of the MVL, the insolvency practitioner takes control of the company, and the liquidation process commences.
Company liquidation commences – The company enters Members’ Voluntary Liquidation, the relevant documents are prepared and submitted, and parties are notified, such as HMRC and Companies House. The liquidation is advertised in the Gazette, making it a matter of public record and creditors are invited to submit their claims at this stage.
Funds distributed – Once confirmation is received that the company has no outstanding liabilities, capital distributions are made to shareholders, and the company is closed and removed from the Companies House register after three months.
What is a Declaration of Solvency in a Members’ Voluntary Liquidation Procedure?
A Declaration of Solvency is a legal document company directors must sign when entering their business into an MVL. It attests to the business’s solvency, and more specifically, that it can pay all its outstanding liabilities, including statutory interest, within 12 months of the start of the liquidation process.
The purpose of a Declaration of Solvency is to ensure that the company is suitable for a solvent liquidation process and reassure those owed money by the business (its creditors) that they will be repaid in full.
What does a Declaration of Solvency include?
The Declaration of Solvency is a simple document that includes the company’s details, the names, addresses and signatures of the company directors, and a statement that the directors have assessed the company and believe it can pay its debts.
It must be accompanied by a statement of its assets and liabilities. This document provides an overview of the company’s financial position, including details of its remaining assets and debts, the cost of the liquidation procedure and any interest due to the company’s creditors. The aim is to give the shareholders a clear picture of the capital distribution they can expect from the liquidation.
Who signs a Declaration of Solvency?
The company directors must sign the Declaration of Solvency in the presence of a solicitor. If there are one or two directors then they all must sign it. If the company has more than two directors, it should be signed by the majority. Once it’s signed, the declaration is filed at Companies House.
What if you wrongly sign a Declaration of Solvency?
When company directors decide to liquidate a business, they must assess its financial position to determine the appropriate closure procedure. For the company to be solvent, it must be able to pay all its debts, including future debts that may arise (known as contingent liabilities), within 12 months. Examples of contingent liabilities include employee claims for redundancy and notice pay.
If the company cannot cover all its current and contingent liabilities, you must not sign a Declaration of Solvency. Signing a Declaration of Solvency falsely, knowingly or otherwise, is a criminal offence that can lead to penalties including fines, director disqualification and even a prison sentence.
That’s why it’s so important that you evaluate your company’s position accurately in the first instance. Contacting a licensed Insolvency Practitioner as soon as you decide to liquidate is highly advisable. They will be able to determine your company’s financial status and guide you through the appropriate procedure from start to finish.
My company is insolvent – what should I do?
If your company is insolvent, you cannot close it using a Members’ Voluntary Liquidation. Instead, you can use an insolvent liquidation procedure called a Creditors’ Voluntary Liquidation (CVL). That will allow you to close your business in a way that meets your legal duties while taking care of its debts in the process. Like an MVL, you must contact a licensed Insolvency Practitioner to administer the CVL procedure.
How can we help?
At Solvent Liquidation, we can assess the financial position of your business to determine its solvency and guide you through the MVL process from start to finish. Get in touch if you have any questions or would like to arrange a free, same-day consultation with one of our team.
How can Solvent Liquidations help limited company directors?
At Solvent Liquidations, we believe that closing a solvent business should be an expertly managed, stress-free process that guarantees the quick distribution of funds and a tax-efficient exit. Our team of licensed insolvency practitioners and company liquidation specialists are all you need to close a solvent company efficiently and with ease. We are the UK’s number one provider of company liquidation services and are trusted by company directors nationwide.
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