Declaration of solvency

A declaration of solvency is a formal, written declaration, made by the majority of the directors of a company stating that in the directors’ opinion, the company is solvent. Solvency refers to a state in which a debtor is financially sustainable, and can therefore pay all debts as and when they become due and payable. The cash-flow test for solvency is prescribed by the Bankruptcy Act 1966 (Cth) s 5(2) and the Corporations Act 2001 (Cth) s 95A. A declaration of solvency usually follows either insolvency and plans for a company to be wound up, or buybacks. Where the declaration is required because the company is going to be wound up, it also states that in the directors’ opinion the company will be able to pay its debts in full within 12 months from the commencement of the winding up. Where it is required because of buybacks, it also states that in the directors’ opinion, the company will remain solvent for the next 12 months while all the buybacks and buyback schemes proposed for that period are carried out.

An approved form for a declaration of solvency is available from the Australian Securities and Investment Commission’s website.