Solvency Resolution

In accordance with the Corporations Act 2001, the majority of decisions your company makes must be made using a resolution. In order for your resolution to comply with these laws, the document must be signed by all shareholders who are entitled to vote. 

It’s important to remember that despite the fact legislation allows you to pass a resolution in this way, your company constitution or shareholders agreement may require a different process. For example, your constitution might state that shareholders must hold a meeting for all resolutions. Therefore it is recommended that you review these documents first to check whether your company has a specific procedure regarding passing resolutions. 

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.

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.

Use this Resolution If:

• You want to formally acknowledge that the company is solvent.
• All relevant directors agree the company is solvent.
• Your company constitution or shareholder’s agreement does not have any conflicting procedures concerning passing resolutions

What does this Resolution cover?

• Confirms the company is solvent/
• Signatures by the relevant directors confirming the company’s solvency.

Further information:

• What is a Solvency Resolution?
• What is insolvent trading? (2020 update)