WHAT IS A SOLVENCY RESOLUTION?

Sep 13, 2014

So, your accountant has sent you a Solvency Resolution to sign. What’s that all about?!

Definition: A solvent company is one where the assets are more than the liabilities. An insolvent company is the opposite, namely, the liabilities e.g., loans are more than the assets, e.g. house.

The Companies Act 1993 makes the following provisions:

  1. Under section 135 of the Act, a director must not allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; 
  2. Section 136 of the Act provides that a director must not agree to the company incurring an obligation unless the director believes that at that time, on reasonable grounds, the company will be able to perform their obligations. 
  3. In addition, the company cannot (while it remains insolvent), issue a “solvency certificate” which is a necessary pre-requisite to a number of matters such as paying a dividend, reducing its capital, and (in some circumstances) paying salaries or drawings to working shareholders.

So, in view of these requirements of the Act, your accountant may ask you as a shareholder to sign a resolution stating that you will financially support the company.

Note: If you have a LTC and it has a land-and-build-to-rent project, then it is likely that during the construction phase your LTC will be technically insolvent.

For more information, please call us on 0800 890 132 or contact us here

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