Directors Declaration of Solvency

What is a directors declaration of solvency and when should you use it?

A director’s declaration of solvency is a formal, written statement made by a company’s directors, or a majority of them, affirming that the company is able to meet its financial obligations as they become due.

It’s a key part of the Summary Approval Procedure (SAP) under chapter 7, part 4 of the Companies Act 2014.

What is SAP?

The purpose of SAP is to authorise activities which would otherwise be prohibited or, in some cases, could otherwise only be engaged in with court consent.

These “restricted activities” are:

• Financial assistance for the acquisition of shares
• Reduction of company capital
• Variation of company capital on a reorganisation
• Treatment of pre-acquisition profits or losses
• Loans etc to directors and others
• Mergers
• Members voluntary winding up

As part of the approval process, a declaration of solvency needs to be made in writing by the directors (or by a majority of directors where there are more than two).

The declaration must be filed with the CRO within 21 days after the date on which the restricted activity takes place.

The directors’ declaration will vary depending on the restricted activity.

However, in all cases, the declaration should set out the following:

• nature of the benefit that will accrue to the company
• circumstances of the transaction
• confirmation that the company will be able to pay/discharge its debts as they fall due during the 12-month period following the restricted activity

When deciding whether he or she can properly make the declaration, a director should look at various factors, including working capital figures, the cash flow for the group and the company, and relevant management accounts.

Although, for certain restricted activities, the summary approval procedure requires an independent report from an expert (qualified to be the statutory auditor of the company) setting out an opinion as to whether the declaration is not unreasonable, the Act does not require directors of the company to involve the auditors in the process whereby directors make the declarations.

However, in some cases it may be appropriate to do so.

It is for the directors to determine what information they ought to rely on to get comfortable that the company will be able to pay its debts as they fall due for the purposes of the requisite declaration.

Relevant board minutes should then describe this information and any documents, as well as note any other relevant considerations (such as discussions with the financial director).

Board minutes should also note specific details of the assets and liabilities that have been considered.

The company should document any group company financial support upon which it depends so that it can be properly considered as an asset.

Personal Liability for Directors

Where a company director makes such a declaration without having reasonable grounds for the opinion that it expresses, the court may declare that the director is (without limitation of liability) personally responsible for all of the debts or other liabilities of the company.

If the company is wound up within 12 months of the making of the declaration and its debts are not paid or provided for in full within 12 months after the commencement of the winding up, it will be presumed, unless the contrary is shown, that each director of the company who made the declaration did not have reasonable grounds for expressing the opinion referred to above.

Therefore, the onus is on the director to prove that he or she had reasonable grounds for expressing the opinion.