Declaration of solvency

By:

Arti

Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.

Reviewed by:

Prash Raval

Prash is a financial writer for Invezz covering FX, the stock market and investing. For over a decade he has traded spot FX full time while... read more.

Updated:  Jun 7, 2024

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4 min read

Key Takeaways

1. A Declaration of Solvency is a formal statement by a company’s directors or officers confirming that the company is solvent and able to meet its financial obligations as they fall due.
2. The Declaration of Solvency is commonly required in corporate transactions such as voluntary liquidation, reduction of capital, or distributions to shareholders.
3. Making a false Declaration of Solvency can have serious legal consequences, including personal liability for directors or officers who knowingly make a false statement.

What is a Declaration of Solvency

A Declaration of Solvency is a legal document signed by the directors or officers of a company certifying that, based on their knowledge and belief, the company is solvent and can pay its debts in full within the specified period, usually twelve months. The declaration typically includes a statement of the company’s assets and liabilities, along with supporting financial information and evidence to substantiate the solvency claim. The purpose of the Declaration of Solvency is to provide assurance to creditors, shareholders, and other stakeholders that the company is not at risk of insolvency and can fulfill its financial obligations without causing harm to creditors or shareholders.

Importance of a Declaration of Solvency

A Declaration of Solvency serves several important purposes in corporate transactions and restructuring processes:

• Legal compliance: In many jurisdictions, a Declaration of Solvency is a legal requirement for certain corporate actions, such as voluntary liquidation, reduction of capital, or distributions to shareholders, to ensure compliance with company law and regulatory requirements.
• Creditor protection: By requiring a Declaration of Solvency, creditors can obtain assurance that the company has sufficient assets to satisfy its liabilities, reducing the risk of creditors being left unpaid in the event of insolvency.
• Shareholder confidence: Shareholders rely on the Declaration of Solvency to assess the financial health and viability of the company, making informed decisions about corporate transactions and investments.

How a Declaration of Solvency Works

A Declaration of Solvency typically follows a standardized format and process, including the following steps:

1. Preparation: The directors or officers of the company gather relevant financial information, such as balance sheets, cash flow statements, and asset valuations, to assess the company’s solvency and prepare the Declaration of Solvency.
2. Review and approval: The directors or officers review the financial information and supporting documentation to ensure accuracy and completeness before approving and signing the Declaration of Solvency.
3. Submission: The signed Declaration of Solvency is submitted to the relevant authorities, such as the company registrar or regulatory agency, along with any required supporting documents and filings, as part of the corporate transaction or restructuring process.
4. Publication: In some cases, the Declaration of Solvency may need to be published or circulated to creditors, shareholders, and other stakeholders to provide transparency and disclosure about the company’s financial status and solvency.

Examples of Declaration of Solvency

Examples of situations where a Declaration of Solvency may be required include:

• Voluntary liquidation: When a company decides to wind up its affairs voluntarily, the directors may need to make a Declaration of Solvency to confirm that the company can pay its debts in full within twelve months.
• Reduction of capital: In a reduction of capital process, where a company reduces its share capital or cancels unpaid share capital, the directors may need to provide a Declaration of Solvency to justify the reduction and protect creditors’ interests.
• Distributions to shareholders: Before distributing assets or funds to shareholders, such as dividends or share buybacks, the directors may be required to make a Declaration of Solvency to ensure that the company’s assets exceed its liabilities.

Real-World Application

Declaration of Solvency requirements and procedures may vary depending on the jurisdiction and the specific circumstances of the corporate transaction or restructuring process:

• In the United Kingdom, under the Companies Act 2006, directors are required to make a Declaration of Solvency when proposing a members’ voluntary liquidation, confirming that the company is solvent and able to pay its debts.
• In the United States, state laws and regulations govern the requirements and procedures for making a Declaration of Solvency in corporate transactions such as mergers, acquisitions, and dissolutions, with directors or officers required to provide accurate and truthful representations about the company’s financial status.