Declaration of Solvency and Supporting Documents in Voluntary Liquidation

Understand Declaration of Solvency and Supporting Documents

Key rules to remember

Who gives the declaration

Company: majority of directors, verified by affidavit | LLP: majority of designated partners | Other corporate persons: majority of the governing body

Section 59(3)(a) covers companies. Regulation 3(1)(a) covers LLPs and other corporate persons, that is, corporate persons other than a company.

Eligibility

Corporate person that has not committed any default

Section 59(1). A defaulter cannot use this route.

Contents of the declaration (company)

(1) Full inquiry made + opinion: no debt, or debts payable in full from asset-sale proceeds; (2) not liquidated to defraud any person; (3) each debt listed; (4) provision for preservation of records

Items 1 and 2 are in section 59(3)(a). Items 3 and 4 come from Regulation 3(4) and 3(5), which extend to section 59(3)(a) declarations. For a corporate person other than a company, add a statement of sufficient provision for pending matters under Regulation 3(1)(a)(iii).

Documents to accompany (company)

Audited financial statements and record of business operations (previous 2 years or since incorporation, whichever is later) + valuation report of assets by a registered valuer, if any

Section 59(3)(b). For corporate persons other than a company, Regulation 3(1)(b)(iii) adds disclosure of pending proceedings, assessments and litigations. The Regulations say the valuer follows the format notified by the Board by circular.

Time limit after declaration

Resolution within 4 weeks of the declaration

Special resolution for a company appointing an insolvency professional as liquidator. If the company owes debt, creditors holding two-thirds in value approve it within 7 days of the resolution.

Notice of resolution

Notify Registrar of Companies and the Board within 7 days of the resolution or the creditors' approval

Section 59(4). Liquidation is deemed to commence on the date of the resolution, subject to creditor approval (section 59(5)).

How to solve Declaration of Solvency and Supporting Documents questions

1. 1Check eligibility first. Ask if the corporate person has committed any default. If yes, section 59 is not available.
2. 2Identify the entity type. Company means majority of directors. LLP means majority of designated partners. Other corporate persons mean majority of the governing body.
3. 3Test the declaration. Is it verified by an affidavit? Does it state the full inquiry, the solvency opinion and the no-fraud statement?
4. 4Add the regulation requirements. For a company: list of each debt (Regulation 3(4)) and provision for preservation of records (Regulation 3(5)). For a corporate person other than a company, also the provision for pending matters (Regulation 3(1)(a)(iii)).
5. 5Check the attachments. For a company: audited financials for two years or since incorporation, and the registered valuer's report on assets, if any. For a corporate person other than a company, also the disclosure of pending proceedings and litigation.
6. 6Check timing: resolution within four weeks of the declaration, creditor approval within seven days if there is debt, and notice to Registrar and Board within seven days.
7. 7Conclude clearly whether the declaration and documents are valid, name what is missing, and say what the board must do to cure it.

Quickest way: Declaration checklist: WHO, WHAT, WITH, WHEN

Common mistakes in Declaration of Solvency and Supporting Documents

• Saying all directors must sign the declaration.

  Students assume unanimity is needed for a serious step.

  Fix: Write 'majority of the directors', as in section 59(3)(a). Add that it is verified by an affidavit.

• Forgetting that the company must not have committed any default.

  Students focus on solvency and skip the threshold condition in section 59(1).

  Fix: Start every answer with eligibility. Solvency opinion and absence of default are separate tests.

• Treating the valuation report as optional in every case.

  The text says 'if any', and students read it as 'not needed'.

  Fix: Say the report is of the assets, prepared by a registered valuer, where one has been prepared or the assets call for it. In a case question, point out the 'if any' wording and check the facts. The Regulations also say the valuer follows the Board's notified format.

• Counting the four weeks from the board meeting date or from the date of the affidavit's drafting.

  Students are loose about which event starts the clock.

  Fix: The four weeks run from the declaration. The seven-day creditor approval runs from the resolution.

• Leaving out the Regulation additions: list of each debt and record preservation for a company, and pending matters for other corporate persons.

  Students learn only the Code and not the Regulations, or apply Regulation 3(1) to companies.

  Fix: For a company, cite Regulation 3(4) and 3(5) for the debt list and records. Cite Regulation 3(1)(a)(iii) and 3(1)(b)(iii) for pending matters only for corporate persons other than a company.

• Mixing up the two-thirds creditor approval with the member resolution.

  Both appear in the same clause.

  Fix: Members pass a special resolution. Creditors holding two-thirds in value approve it within seven days, only where the company owes debt.

Worked examples