This article is part of the reference collection published by Harper James, a UK full-service commercial law firm advising businesses on the laws of England and Wales. A solvency statement is a formal declaration made by directors when a private company uses the statutory solvency statement procedure to reduce its share capital.
The directors must state that they have formed the opinion that the company will be able to pay, or otherwise discharge, its debts in full as they fall due. The assessment includes existing, contingent and prospective liabilities. For a private company capital reduction, the directors must also consider whether the company will remain able to meet its debts for the 12 months following the statement, or, if the company is expected to be wound up during that period, whether it will pay its debts in full within that process.
The statement is not a routine Companies House form or a substitute for financial analysis. Directors should review current management accounts, cash-flow forecasts, tax liabilities, loan terms, customer and supplier commitments, litigation exposure, employee costs and other contingent liabilities. The board should record the information considered, the assumptions used and the reasons supporting its conclusion.
For a private company capital reduction, all directors must sign the solvency statement. It must be made no more than 15 days before the shareholders pass the relevant special resolution, and the statement must be delivered to Companies House within 15 days after that resolution. The company must also follow the applicable filing and accounting requirements. Public companies generally use the court-approved reduction procedure instead of the private company solvency statement route.
Directors should not sign simply because the balance sheet shows net assets or because the proposed transaction is commercially desirable. A director who makes a solvency statement without reasonable grounds faces personal risk, including criminal liability under the Companies Act 2006. Before signing, the board should obtain current evidence, challenge optimistic forecasts and take specific advice where the company has tight liquidity, disputed debts, refinancing pressure or material contingent liabilities. Further reading is available in these company law resources.
Start by defining the transaction and the statutory route, then prepare a complete liabilities schedule and a rolling cash-flow forecast. Test the forecast against delayed customer payments, cost increases, covenant requirements and realistic downside assumptions. Confirm that every director has reviewed the evidence, document the board’s decision, pass the required shareholder resolution and complete the Companies House filing on time. Solvency is a continuing governance issue, not a one-off formality, so directors should revisit the company’s financial position if circumstances change before completion.