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Declaration of Solvency: Everything You Need To Know

ByDave Stopher

Jul 15, 2020 #Business

When it comes to managing a successful business, it all boils down to how, as an entrepreneur, you can manage your expenses, taxes, debts, and the overall financial health of your business. It’s for this reason that most successful businesses will consider timely financial analysis to determine their net worth and the business’s sustainability. 

These are critical aspects when running a business in a competitive market space. The greatest indicators of growth in any business lie in its profit margins, the business’ operating efficiency, liquidity, and solvency. These are areas that need to be scrutinized regularly for any venture, whether great or small, to thrive. Without further ado, here’s everything you need to know about the declaration of solvency.

What’s The Declaration of Solvency?

The declaration of solvency can, in layman’s terms, be defined as an official written declaration listing a company’s assets and liabilities. This document is made by the majority of the shareholders and must be presented to the Registrar of Companies in the case where the company’s dissolution is imminent. In line with the guys from Approved Recovery, a declaration of solvency can help dissolve a company in ensuring a smooth and orderly conclusion. Nonetheless, it’s a process that requires the involvement of professionally licensed insolvency practitioners and the participation of all the parties involved. Below are the roles of insolvency practitioners. They include:

  • Completing the relevant paperwork before deadlines and making reports to the relevant authorities
  • Acting as a liaison between the company and the creditors
  • Settling the costs of liquidation
  • Ensuring that the company is removed from the Companies Registrar if need be

What’s Contained in a Declaration of Solvency?

As earlier mentioned, the declaration of solvency is a formal document highlighting a company’s assets and liabilities. But there’s more to it than meets the eye. The declaration of solvency also contains the endorsements from a certified liquidator and a sworn declaration of solvency. Why a sworn declaration of solvency? You might ask. Now, as it turns out, it’s unlawful to provide false and inaccurate information in the solvency process. In legal terms, this is a breach of fiduciary duties punishable by law. Persons found guilty of such charges could be slapped with hefty fines, time in prison, or both. Other consequences of falsifying a declaration of solvency may include:

  • Disqualification of company directors
  • Funds received by the directors must be returned to the company on an indemnity basis.
  • The company can be reposed under the debtors’ voluntary liquidation.

Solvency Resolutions

Solvency resolutions are made by company directors who in their suggestions, will indicate the company’s ability or inability to settle its debts. The decisions made in a solvency resolution process are based on facts. 

This includes detailed analysis from audits, financial statements, and factual evidence of the company’s financial stability or instability. The outcomes of a solvency resolution process can be positive or negative. Positive, in the sense that the company can settle its debts or negative in the sense that it’s unable to.

The Statement of Assets and Liabilities

Before a company is declared solvent, the declaration of the solvency document must be accompanied by an assets and liabilities statement. This is a document that contains the company’s assets, liabilities, and liquidations. This way, shareholders will have an accurate assessment of capital distributions. The statement of assets and liabilities is achieved by carefully analyzing a company’s statements of cash flow and balance sheets. Such analysis will highlight the red flags within a company’s finances, which in most cases can be an indicator of insolvency.

Members’ Voluntary Liquidation (MVL)

There will not be a practical winding up of a company without the mention of the declaration of solvency. Choosing to dissolve a company has its benefits such as; it’s tax-efficient, it prevents various legal implications, and it’s also beneficial to all the parties involved. Members’ voluntary liquidation will only apply to solvent companies looking to close business. Additionally, it could also be as a result of shareholders who wish to split a company’s assets or retire. Either way, members need to enlist a qualified liquidator to officially close business. However, the declaration of solvency will be signed before the members’ voluntary liquidation is officially initiated.

There are so many reasons why financial assessments and analyses are critical to a company’s stability. The key benefit has to do with avoiding insolvency. This simply means that a business cannot sustain itself or pay its debt. In the long term, business assets are held by creditors as it cannot meet its obligations. As an entrepreneur, you should always aim at maintaining your business solvency.  

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