What is a Solvency Resolution?

You may have heard the term solvency resolution mentioned in meetings or in conversation. But what does it mean? And does your company need to pass one? Solvency resolutions are an important requirement company director’s must pass annually. As a company, you can face fines and penalties if you fail to carry out a resolution. Read our guide to unpack what a solvency resolution is and what the law says about this.

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What is a Solvency Resolution?

In summary, a solvency resolution is a declaration made by the company’s directors that the company is able or unable to pay their debts as they fall due. This is their opinion at the time of the resolution. A company must pass a resolution no more than two months after the date of the annual review.

There must be a reasonable basis for passing the resolution. Therefore, as with any company resolution, it must be passed by the majority of the directors in the company. Ultimately, a solvency resolution indicates whether the director’s are of the opinion that the company is solvent or insolvent. For more information, you can read our guide ‘Do I Need to Pay an Annual Fee to Keep my Company Active?‘.

What Does The Law Say?

You might be wondering whether you are required by law to pass a resolution. The Corporations Act 2001 (Cth) governs this area. Specifically, section 347A holds directors of a company must pass a solvency resolution within two months of the annual review date.

So what happens if you haven’t passed a solvency resolution? Well, if director’s do not pass a resolution, they must lodge a Form 485 to ASIC. ASIC states this must be lodged seven days after the end of the two-month period following the annual review date. However, if you are unsure what the date of your annual review is, you can search the ASIC register. Additionally, you can read our guide ‘What Is A Company Resolution?‘ for more information on resolutions generally.

Moreover, it is worth noting companies who wind up voluntarily need to lodge a declaration of solvency. Form 520 is a declaration that the directors’ will be able to pay debts in full within 12 months of voluntary winding up.

Types of Solvency Resolutions

In summary, there are two types of solvency resolutions: positive solvency resolutions and negative solvency resolutions. So what is the difference?

Positive Solvency Resolution

In a perfect world, every company would pass a positive solvency resolution. This indicates that the company’s directors believe the company will be able to pay its debts by their due date. There is no need to notify Australian Securities and Investments Commission (ASIC) where a positive resolution is passed. However, you do need to ensure that you store the resolution on file.

Negative Solvency Resolution

Unfortunately, not all companies are profitable. A negative solvency resolution means the director’s believe, in their opinion, the company will be unable to pay its debts as they fall due.

Where this is the case, you must lodge a Form 485 with ASIC. This form is a statement in relation to company solvency. This must be lodged within seven days after the negative resolution is passed. You will not incur any fees in doing this unless you are late in lodging your form.

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Key Takeaways

Ultimately, a solvency resolution is a key requirement company director’s must pass annually. Hence, it is important to know your annual review date and ensure you pass the mandatory resolutions. You may incur fees or penalties if this is not done. If you are unsure or need further assistance, we recommend consulting a Corporate Lawyer.

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