If your company is ready to close its doors (for the right reasons), a Members’ Voluntary Liquidation (MVL) can be a clean and structured way to wrap things up.
But there’s one document that sits at the heart of the MVL process: a declaration of solvency.
For many small business owners, this is the moment where the “admin side” of closing a company turns into a very real legal responsibility. As a director, you’re effectively saying: we can pay all our debts in full within the required time. That statement needs to be made carefully, based on evidence, and supported by up-to-date financial information.
Below, we’ll break down what a declaration of solvency is, why it matters, what you need to check before signing, and what can go wrong if it’s inaccurate - all from a practical small business perspective.
What Is A Declaration Of Solvency (And Why Does It Matter)?
A declaration of solvency is a formal statement made by the directors of a company before it enters a Members’ Voluntary Liquidation.
In plain English, you’re declaring that:
- the company will be able to pay all its debts; and
- those debts can be paid in full within a specified period (in an MVL, this is generally within 12 months after the start of the winding up).
This matters because an MVL is only available for a company that is solvent (able to pay its debts when they fall due). If the company is actually insolvent, the liquidation path is usually different, and directors have different obligations.
What “Solvent” Really Means For A Small Business
Solvency isn’t just about whether your bank account looks healthy today. It’s about whether your company can pay its debts as and when they fall due - including upcoming bills you know are coming, and liabilities that might not be obvious at first glance.
That includes things like:
- supplier invoices and contractor payments
- tax liabilities (including BAS/GST and PAYG withholding)
- superannuation obligations
- lease make-good obligations (if relevant)
- employee entitlements (if the company has employees)
- any loan repayments (including informal arrangements)
Directors often feel confident because the business “has assets”, but solvency is really about timing and certainty - can the company actually convert assets into cash and pay everyone in time?
What Is A Members’ Voluntary Liquidation (MVL)?
A Members’ Voluntary Liquidation is a formal winding-up process where a solvent company chooses to close down, appoint a liquidator, finalise affairs, and deregister.
Small business owners often consider an MVL when:
- the business has stopped trading and you want to close the company properly
- you’ve sold the business assets and the company is no longer needed
- you’re restructuring and retiring one entity
- you’re wrapping up a project company (for example, a special purpose vehicle that’s completed its purpose)
MVL Vs Insolvent Liquidation (Why The Declaration Is The Fork In The Road)
The declaration of solvency is effectively the gatekeeper. If you can truthfully make it, you may be eligible for an MVL. If you cannot, the company may need to consider an insolvency process instead.
That’s why it’s so important not to treat a declaration of solvency as a “formality”. It’s a legal statement that should follow real financial due diligence.
MVL And Your Company’s Internal Documents
Before you even get to the liquidation paperwork, it’s worth checking your company’s internal governance documents. For example, your Company Constitution (if you have one) and any Shareholders Agreement may set out rules about director decisions, member approvals, and how disputes are handled.
This is especially important if there are multiple shareholders and not everyone is aligned on closing the company.
What Directors Must Do Before Signing A Declaration Of Solvency
If you’re a director, the safest approach is to think of the declaration of solvency as the end point of a process - not the starting point.
Before you sign, you should be able to show that you made a genuine, informed assessment based on the company’s financial position.
You’ll typically need current financials to support the declaration. For a small business, that usually means ensuring you have a clear, current view of:
- assets (cash, equipment, stock, receivables)
- liabilities (supplier bills, loans, tax, super, employee entitlements)
- any contingent liabilities (possible future debts, like disputes or guarantees)
Even if you have bookkeeping software, it’s common for “paper solvency” to differ from reality if bills haven’t been entered properly or tax liabilities haven’t been reconciled.
Important: directors should generally confirm tax-related figures (such as BAS/GST, PAYG withholding and super) with their accountant or a registered tax agent. Sprintlaw can help with the legal process and documentation, but we don’t provide tax advice.
2. Check For Secured Debts And Security Interests
One of the most overlooked issues is secured debt.
If your company has borrowed money, it may have granted security (for example, over all present and after-acquired property). In small business lending, this is commonly documented as a general security agreement.
You should also consider whether there are any registrations on the PPSR (Personal Property Securities Register) affecting the company’s assets, because that can impact who gets paid first and whether the company can freely deal with assets during the wind-up.
3. Identify Any Director And Shareholder Balances Properly
In many owner-operated companies, directors have running balances with the business. Sometimes the company owes the director money. Sometimes it’s the other way around.
If there is a director loan involved, you’ll want to confirm:
- who owes who (company vs director)
- whether repayment is due
- what the records actually show (and whether they reflect reality)
This matters because a company that “looks solvent” may become insolvent once you correctly account for debts owed to (or by) directors.
4. Consider Contingent Liabilities (The “What If” Debts)
Contingent liabilities are potential debts that may arise depending on future events.
Common examples for small businesses include:
- a threatened dispute with a customer or supplier
- a guarantee given by the company (for example, to support another entity’s obligations)
- make-good obligations in a commercial lease
- warranties or rectification obligations on past work
Contingent liabilities are important because your declaration of solvency needs to be realistic, not optimistic. If there is a genuine possibility of a significant liability, you need to factor that into your solvency assessment.
5. Make Sure You’ve Followed The Correct Director Approval Process
Companies generally need directors to properly approve key decisions (and to record them). Even where you’re a sole director, you should still document the decision correctly.
Practically, this also means checking the technical requirements for the declaration itself - including that it’s made by a majority of directors (where there is more than one director), and that it is made within the required timeframe before the members resolve to wind up the company (commonly, the declaration needs to be made shortly before the winding up resolution and then lodged with ASIC as required).
It’s also worth distinguishing between a director declaration and other corporate decisions - for example, a solvency resolution is a different concept and is used in different contexts. Mixing up corporate compliance steps can create headaches later if ASIC or a liquidator queries the process.
Common Mistakes Directors Make (And How To Avoid Them)
Most directors don’t set out to do the wrong thing - but liquidation is an area where small oversights can become big problems.
Mistake 1: Assuming “We Have Assets” Means “We’re Solvent”
A company can own valuable assets and still be insolvent if it can’t pay debts when they’re due.
For example, you might have equipment or stock, but if it can’t be sold quickly (or can only be sold at a discount), it may not help you meet short-term liabilities.
What to do instead: stress-test your cashflow timing. Ask: “If we had to pay everyone within the required timeframe, can we?”
Mistake 2: Forgetting Tax, Super, And Employee Entitlements
For many small businesses, the “silent” liabilities are the ones that cause the most trouble:
- superannuation
- PAYG withholding
- GST/BAS liabilities
- leave entitlements
What to do instead: reconcile these properly before signing anything, and don’t rely on rough estimates. Where relevant, confirm figures with your accountant or registered tax agent (particularly for BAS/PAYG and super obligations).
Mistake 3: Ignoring Security Interests And Priority Issues
Even if you can pay debts in full, secured creditors can have rights over assets that affect what you can do during the wind-up.
What to do instead: identify secured arrangements early (including anything registered on the PPSR) and understand how that impacts the liquidation steps.
Mistake 4: Treating The Declaration Like A Box-Ticking Exercise
A declaration of solvency is not just administrative. It’s a director statement with legal weight.
What to do instead: treat it like signing a major contract - check the facts, document the basis for your view, and get advice where needed.
What Happens If The Declaration Of Solvency Is Wrong?
If a declaration of solvency is made and it turns out the company can’t pay its debts as declared, the consequences can be serious - especially if there are allegations the directors did not take reasonable care.
While each situation is different, the key risks include:
- the liquidation may need to shift from a members’ voluntary process to a creditors’ process
- greater scrutiny of director conduct leading up to the liquidation
- potential personal exposure for directors in certain circumstances (depending on the facts)
- delays and higher professional costs as issues are investigated and corrected
Even aside from legal consequences, an incorrect declaration can create practical stress: relationships with creditors can deteriorate, key stakeholders can lose trust, and the winding-up can take far longer than expected.
This is why it’s worth slowing down before you sign and making sure your solvency assessment is truly defensible.
What Happens After A Declaration Of Solvency Is Made?
Once the declaration of solvency is in place, the company can proceed with the Members’ Voluntary Liquidation process (which typically involves appointing a registered liquidator and taking steps to wind up the company’s affairs).
At a high level, the process often includes:
- appointing a liquidator to manage the wind-up
- notifying relevant parties and managing statutory steps
- finalising debts and liabilities (including taxes and any final payments)
- realising assets (if needed) and distributing any surplus to members
- completing the formal deregistration steps
Practical Tips To Keep The MVL Smooth
From a small business point of view, an MVL tends to run more smoothly when you:
- stop entering into new obligations before the wind-up
- keep business and personal transactions clearly separated
- maintain clean records for decisions (especially if there are multiple directors/shareholders)
- resolve disputes and questionable debts early where possible
It can also help to line up your “end-of-life” business housekeeping early - things like finalising supplier arrangements, wrapping up subscriptions, and ensuring customer communications are clear (especially if you’ve been trading online).
Key Takeaways
- A declaration of solvency is a director’s formal statement that the company can pay all debts in full within the required timeframe (commonly, within 12 months from the start of the winding up) before an MVL.
- An MVL is designed for solvent companies - so your solvency assessment needs to be based on accurate, current financial information.
- Before signing, directors should check not only obvious debts, but also tax, super, employee entitlements, secured debts, and any contingent liabilities. Tax-related figures should generally be confirmed with an accountant or registered tax agent.
- Security arrangements (including general security agreements and PPSR registrations) can affect how assets are handled during a wind-up.
- If the declaration of solvency is wrong, the liquidation can become more complex and may expose directors to greater scrutiny and risk.
- Good governance documents and clear decision-making records can make the process smoother, especially where there are multiple shareholders.
If you’d like legal help with the steps leading into a Members’ Voluntary Liquidation (for example, reviewing your company’s documents, resolutions and the declaration process, and liaising with your external accountant and registered liquidator), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
