How to write a statement of solvency

Written by mike bailey
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How to write a statement of solvency
Signing a solvency statement may allow company directors to reduce share capital. (Brand X Pictures/Brand X Pictures/Getty Images)

During 2010, small firms across Britain increased sales for the first time in two years, according to a survey by the Open University. Successful companies need to generate attractive returns, but business owners wanting to reward shareholders may not pay a dividend if their balance sheet shows accumulated losses. Reducing the company’s share capital offers an alternative way to distribute assets, and directors of a private limited company may authorise a reduction by special resolution supported by a solvency statement in the prescribed form.

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Instructions

  1. 1

    Prepare your solvency statement as a draft. A second opinion from a professionally qualified adviser is highly desirable to confirm that the document is in the correct form before presenting it to the board of directors.

  2. 2

    Put the full name of the company at the top of the statement. Add the company number immediately below the name.

  3. 3

    Title the document so that it is clearly a solvency statement for the purposes of Section 642 and Section 643 of the Companies Act 2006. State the date on which the document is to be signed.

  4. 4

    Declare that each of the directors of the company at the date of the statement “has formed the opinion, as regards the company's situation at the date of the statement, that there is no ground on which the company could then be found to be unable to pay (or otherwise discharge) its debts.” Section 643 of the Companies Act 2006 requires this wording.

  5. 5

    Check with the directors that the company is to continue trading beyond the next 12 months. If not, state that, in view of the intention to commence the winding up of the company within 12 months of the date of the statement, each of the directors “has formed the opinion that the company will be able to pay (or otherwise discharge) its debts in full within 12 months of the commencement of the winding up.” The Act also requires this wording.

  6. 6

    State that each of the directors “has formed the opinion that the company will be able to pay (or otherwise discharge) its debts as they fall due during the year immediately following the date of the statement.” Again, this is required wording.

  7. 7

    Confirm that, in forming these opinions, each of the directors “has taken into account all of the company's liabilities (including any contingent or prospective liabilities).” This is also prescribed wording.

  8. 8

    Leave space for each director to sign the document. State the full name of each director under the signature as required by the Act.

  9. 9

    Review your draft and correct any errors. Ask a suitably qualified professional adviser to review the solvency statement before submitting it to the directors for signature.

Tips and warnings

  • You can buy a standard-form solvency statement if you do not feel comfortable drafting it yourself.
  • Any director making a false declaration in a solvency statement commits a criminal offence and could face imprisonment for as long as two years.
  • Do not rely on your own expertise if you are inexperienced in this field. Consult a suitably qualified professional adviser. Do not rely solely on the advice in this article when writing a solvency statement.

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