The directors must also make a statement to Companies House that the Solvency Statement was: made no more than 15 days before the relevant special resolution was passed; and provided to members in compliance with the applicable legislation.

What is a Solvency Statement?

1. What this page covers

This page sets out the form and contents of a Solvency Statement.

Please note that only private companies may reduce their capital via the Solvency Statement route, public companies must seek court approval of any proposed reduction.

2. Directors' Solvency Statement

In order to make a Solvency Statement the directors must be of the opinion that:

There is no ground on which the company could be found to be unable to pay its debts as at the date of the statement;
If there is a plan to wind the company up in the next 12 months, that the company will be able to pay its debts in full within 12 months of commencement of the winding up; and
If there is no plan to wind the company up in the next 12 months, that the company will be able to pay its debts as they fall due in the year following the statement.

NOTE: A Solvency Statement made without reasonable grounds for the opinions expressed above can leave the directors facing unlimited personal fines and up to 2 years imprisonment.

The Solvency Statement must:

be in writing in the prescribed form;
be signed by all directors on the same day;
be made no more than 15 days before the special resolution to reduce the capital is passed; and
be provided to shareholders in accordance with the Companies Act.

The directors must carefully consider the financial position of the company and the effect of the proposed reduction before they make a Solvency Statement. This includes considering projections for at least the year ahead and any prospective or contingent liabilities that might arise in that period. Directors should certainly review the latest management accounts before considering these points and might want to interrogate the financial director (if any) and approach the companys accountants/auditors for a view.

The Company Law Committee of the Law Society suggests directors should also:

make a record of the information they consider;
consider any external factors which could effect the company, such as the insolvency of a supplier or loss of a major customer, and the likelihood of such events occurring; and
consider taking advice or receiving comfort from an independent third party as this is likely to show the directors had reasonable grounds for their opinions.