What Is A Declaration Of Solvency In An MVL Process?

Man signing documents

Before we dive into answering the question of ‘what is a Declaration of Solvency in an MVL process’, let’s take a quick moment to clarify what exactly is meant by the term ‘MVL’. An MVL, standing for ‘Member’s Voluntary Liquidation’, is the formal process by which a solvent company is wound up. In an MVL, the company must be solvent i.e able to pay all creditors and liabilities. If a company is insolvent it must liquidate via Creditor’s Voluntary Liquidation (CVL).

That’s what we mean by ‘MVL’, but what is a Declaration of Solvency and what does it have to do with Member’s Voluntary Liquidation?

A Declaration of Solvency is a document that must be signed by the company directors in front of a solicitor or notary swearing that the company is solvent. The declaration confirms that the company is able to settle its outstanding liabilities (along with any interest) within a maximum period of 12 months from the start of the liquidation process. The declaration must be signed before the MVL can be initiated.

Hopefully, this definition has provided some clarification regarding ‘what is a Declaration of Solvency’, what you’re likely to be wondering now is what exactly does it contain?

Put simply, the contents of a Declaration of Solvency can be broken down into 3 parts:

1. Statement Of Assets & Liabilities

A Statement of Assets and Liabilities must always accompany the Declaration of Solvency. The statement sets out the company’s financial position ahead of liquidation, detailing the company’s remaining assets and estimating the cost of the liquidation process and any interest that will be due to creditors. This provides the shareholders with a more accurate picture of the return they are likely to receive once the capital distribution becomes available. So, as you’ve probably guessed the statement of assets and liabilities is an essential aspect of our answer to the question ‘what is a Declaration of Solvency’. It’s important to note that, similar as the two documents may sound, the Statement of Assets shouldn’t be confused with the ‘Statement of Affairs’ which is prepared during insolvent liquidations.

2. Sworn Declaration of Solvency

Evidently, an absolutely essential part of the MVL process is the sworn declaration itself which must be signed in the presence of a solicitor or notary. The declaration must be sworn by all directors if there is only one or two, or by the majority of directors if there are more than two.

3. Endorsement Of The Proposed Liquidator

The appointed liquidator for the MVL process will endorse the document once it has been presented to the shareholders of the company. From there, resolutions can be passed for the company to enter liquidation. Once it has been endorsed the declaration will be published and put on the official record of the Companies House.

When the MVL process begins, the company assets will be realised in order to pay the remaining creditors. The balance will then be paid to shareholders via capital distribution.

Now that we’ve covered the question of ‘what is a Declaration of Solvency in an MVL process’ there is just one more point we can’t fail to mention in regards to false declarations.

Consequences Of Providing False Information

Providing a false Declaration of Solvency presents a serious threat to the future of a company and is a criminal offence. If it turns out the company is in fact insolvent (i.e liabilities exceed assets), the company could be placed into Creditors’ Voluntary Liquidation ( CVL) and company directors could face disqualification. In the most severe cases, company directors may even face a prison sentence of up to two years.

This is why it’s so important to seek the advice of a licensed insolvency practitioner as early as possible in order to ensure the company is definitely solvent before the declaration is sworn.

Hopefully, this guide has provided you with a helpful answer to the question ‘what is a Declaration of Solvency in an MVL process’. Our sister-site, Ballard Business Recovery, has answers to more of your MVL FAQs, however, please don’t hesitate to get in touch for further professional advice on any of the details we’ve mentioned above.

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