What Is A Solvency Statement? A Guide To Declarations Of Solvency For UK Companies

If you’re running a company in the UK, you’ve likely come across the term “solvency statement” - especially when dealing with big corporate decisions. But what is a solvency statement, really? Is it just more paperwork, or does it have a serious impact on your business and your responsibilities as a director?

The truth is, understanding solvency meaning (and knowing what a solvency statement is for) is crucial if you want to meet your legal duties, avoid personal liability, and keep your business on the right track. Whether you’re thinking of paying dividends, reducing your company’s share capital, or winding things up, the solvency statement often plays an essential role.

In this guide, we’ll break down what a solvency statement is in simple terms, why it matters, and what goes into making one. We’ll walk you through when you’ll need to make a declaration of solvency, what needs to be included, the legal risks of getting it wrong, and the key steps to ensure you’re protected from day one.

Let’s take the mystery out of solvency statements-keep reading for the essentials every UK company director needs to know.

What Is A Solvency Statement?

Let’s get straight to it: a solvency statement is a formal legal declaration that confirms your company is solvent. In plain English, that means your company is able to pay its debts as they fall due and, in some cases, that its assets are worth more than its liabilities.

These statements aren’t just a box-ticking exercise-they’re a legal promise from the company’s directors that the business isn’t in financial trouble. They often come into play during key company actions like a reduction of share capital or certain types of company liquidation (known as “members’ voluntary liquidation”).

Essentially, if directors want to carry out these actions without involving the courts, they must provide this written assurance to Companies House and, sometimes, to company shareholders and creditors. It’s all about making sure these decisions aren’t putting anyone at risk because the company can’t meet its financial obligations.

Solvency Meaning In UK Law

Before we dive deeper, let’s clarify solvency meaning in a UK business context. Solvency refers to your company’s ability to meet its debts, both as they fall due (the “cash flow” test) and its overall financial position (the “balance sheet” test). In other words, a business is solvent if:

• It has enough assets to cover all liabilities, including contingent and prospective debts, and
• It can pay its debts when required, as they become due for payment.

If a business fails these tests, it’s considered insolvent-and that brings serious legal consequences (including for the directors personally).

If you want to read more about limited liability or company liability, we’ve got practical guides to help you understand your legal position as a company director.

When Do You Need A Solvency Statement?

You’ll typically need to make a solvency statement during specific company actions set out by law. Most commonly, these are:

• Reduction of share capital - If your company wants to reduce its share capital using the solvency statement procedure (rather than a court order), directors need to confirm the company will remain solvent afterwards. This process is set out in the Companies Act 2006.
• Members’ voluntary liquidation (MVL) - When a company is being voluntarily wound up and the directors believe it can pay all its debts in full within 12 months, they must make a declaration of solvency.
• Certain reorganisations or buybacks - Solvency statements may be needed for other specific transactions, like redeeming shares out of capital or buying back shares, depending on the circumstances.

If you’re unsure whether your planned company action requires a solvency statement, it’s best to check with a legal expert. Failing to make a declaration when you should (or making one incorrectly) can lead to serious consequences down the line.

Declaration Of Solvency Meaning: What Are Directors Actually Declaring?

The official declaration of solvency meaning is a written statement from the directors that, based on a full inquiry into the company’s affairs, they have reached the opinion that:

• The company can pay its debts in full as they fall due (for at least the specified period, often 12 months in the case of MVLs); and
• The company has no reason to believe any debts will be defaulted on.

This isn’t something to take lightly-the law requires directors to have made a “full inquiry into the company’s affairs.” That means you need to carefully consider the company’s current assets and liabilities, forecast your cash flow, check for upcoming obligations, and (ideally) seek professional advice before signing anything. The declaration is then filed at Companies House and sometimes sent to shareholders or creditors, depending on the situation.

How Do You Prepare A Solvency Statement?

Getting your solvency statement right can feel daunting, but it helps to break it down step by step. Here’s a typical process you’ll need to follow:

1. Hold a Board Meeting
   Gather all company directors to discuss the proposed action (share capital reduction, MVL, etc.). The solvency statement must be made by all or a majority of the directors.
2. Review Company Finances Thoroughly
   Carry out a full review of the company’s books, assets, liabilities, contracts, and any likely future expenses. Examine any legal claims or contingent liabilities.
3. Consider Future Cash Flow
   It’s not enough to be solvent today-you need to reasonably foresee the company can pay its debts as they come due for the required period.
4. Draft The Solvency Statement In The Required Legal Form
   The wording must comply with Companies Act requirements. It must state the directors’ opinion, the reasons for reaching that opinion, and be signed by each director making it. In some cases, the directors will also swear the statement before a solicitor or notary.
5. File The Solvency Statement
   Submit it to Companies House along with any other required documents (like special resolutions for share capital reduction, or winding up forms for MVL).
6. Notify Shareholders or Creditors (If Required)
   For some procedures, you’ll need to circulate the solvency statement to members or make it available for inspection.

Throughout this process, it’s essential that you don’t gloss over any risk or uncertainty-an false or reckless statement can land you in hot water (see “What Happens If You Get It Wrong?” below).

If you’re considering a share capital reduction, you might find our guide to reducing share capital useful for understanding the broader legal steps required.

What Should Be Included In A Solvency Statement?

While the specific format can vary depending on the reason for the statement, a proper solvency statement must usually include:

• The full legal name and registration number of the company
• The names and signatures of the directors making the statement
• A statement confirming each director has made a full inquiry into the company’s affairs
• The directors’ opinion that the company will be able to pay its debts as they fall due (often for a specified period, e.g. the next 12 months)
• The date the statement is made
• Any additional specific requirements for the action being taken (e.g., members’ voluntary liquidation may have extra confirmations about timing of payments)

For MVLs (members’ voluntary liquidations), the declaration of solvency must be made and filed at Companies House with the winding up resolution. For share capital reductions, the solvency statement must be accompanied by a special resolution of the members and filed accordingly.

Don’t be tempted to cut corners here-an incomplete or poorly drafted solvency statement might mean your company’s transaction is invalid, or worse, you could be found personally liable.

What Happens If You Get It Wrong?

Making an incorrect or misleading solvency statement isn’t just embarrassing-it brings significant legal risk, especially for directors. If, for example, a company enters insolvent liquidation within 12 months after a declaration of solvency was made, the directors could face:

• Personal liability for company debts - Courts can order compensation if the directors didn’t have reasonable grounds for their opinion in the solvency statement.
• Serious legal consequences - Falsely making a solvency statement knowing it’s untrue (or being reckless as to its truth) is a criminal offence. Penalties can include fines and even imprisonment.
• Transaction being unwound - Sometimes the transaction (share reduction, liquidation, etc.) can be set aside or invalidated if the solvency statement was not properly made.

Bottom line? Making a declaration of solvency is a significant legal step. Always seek professional advice and document the reasoning behind your statement in case you’re ever called upon to justify it down the road.

If you’re concerned about director liabilities, our guide to director obligations in the UK covers the essential duties and risk factors you need to know.

Solvency Statement Vs Declaration Of Solvency: Are They The Same?

You might notice the terms “solvency statement” and “declaration of solvency” used interchangeably-what’s the difference?

• Solvency statement is the general term for the formal written confirmation required for actions like share capital reduction (under Section 643 of the Companies Act 2006).
• Declaration of solvency is the version specifically made in the context of a members' voluntary liquidation (under Section 89 of the Insolvency Act 1986).

Both boil down to the same thing: a director’s legally binding promise that the business is solvent, based on a full and proper assessment. The name used simply reflects the company process you’re following.

Best Practice: How To Stay Protected When Making A Solvency Statement

Making the right solvency declaration protects both your company and yourself as a director. Here are some practical ways to strengthen your position:

• Get independent legal advice before making the statement-don’t take chances with the wording or required process.
• Consider a professional accountant’s report to support your assessment of company solvency.
• Keep full records of your inquiry into company finances-minutes of meetings, calculations, forecasts, and any supporting documents.
• Don’t sign under pressure-directors can (and should) refuse to sign a statement if they’re not 100% satisfied with the company’s solvency.
• Be transparent with shareholders-make sure they understand the significance of the statement and have access to relevant information if required.
• Review your articles of association to ensure you’re following any company-specific processes or special rules.

We see many directors come unstuck because they didn’t get proper advice-so if you’re unsure at ANY stage, it’s worth reaching out to a specialist. The cost of an expert review is nothing compared to the risks of a faulty solvency statement.

Key Takeaways

• A solvency statement is a directors’ formal declaration that a company can meet its debts as they fall due-it’s a core part of certain company procedures like share capital reduction and members’ voluntary liquidation.
• Making a correct solvency statement requires a thorough review of company finances, careful documentation, and the right legal formality.
• Directors can face personal and even criminal liability if they make a solvency statement without reasonable grounds or if it turns out to be untrue.
• Always seek professional advice, keep full records, and never sign a solvency statement unless you’re completely satisfied the company is genuinely solvent.
• Setting up your legal foundations correctly from day one - including getting solvency statements and other compliance documents right - protects your business and its directors.

If you’d like help with solvency statements, reviewing your company’s compliance position, or any business legal question, you can reach us at team@sprintlaw.co.uk or 08081347754 for a free, no-obligations chat with our team of friendly legal experts. We’re here to help you get protected and stay compliant, every step of the way.