Attention all Company Officeholders! What is a Solvency Resolution?

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If you’re a director or company secretary of an Australian company, you may be aware that one of your obligations under the Corporations Act 2001 (Cth) (“Corporations Act“) is to pass a solvency resolution annually. Or you might not be aware…in which case, read on.

Under s347A of the Corporations Act, directors of a company must pass a solvency resolution within 2 months of the company’s annual review date. If you don’t know your annual review date, you can find it listed on the ASIC register or check the annual company statement issued by ASIC. A solvency resolution states that the directors believe that the company can (or cannot) pay its debts when they are due. Where the company has a board of directors, the resolution must be passed by a majority. The solvency resolution may be positive (ie: that the company can pay its debts when due) or negative (ie: that the company cannot pay its debts when due).

If a negative solvency resolution is passed, you must lodge it with ASIC via form 485 within seven days. If a positive solvency resolution is passed there is no lodgement requirement, simply keep the resolution on file with your other corporate documents.

Exemptions

A company is exempted from passing a solvency resolution if it has lodged a financial report with ASIC under Chapter 2M of the Corporations Act within the 12 month period prior to the review date.

The following companies are required to lodge a financial report in accordance with Chapter 2M.3 of the Corporations Act (and therefore exempted from passing a solvency resolution):

  • Disclosing entities;
  • Public companies;
  • Large proprietary companies;
  • Registered schemes;
  • Small proprietary companies directed by shareholders (at least 5% of votes) or ASIC to prepare financial reports;
  • Small companies limited by guarantee directed by shareholders (at least 5% of votes) or ASIC to prepare financial reports;
  • Small proprietary companies that are controlled by a foreign company; and
  • Small proprietary companies that have one or more Crowd Sourced Funding shareholder during the financial year.

You can purchase a template Solvency Resolution from our online shop.

If you require any assistance in preparing a solvency resolution or you are unsure if you need to pass a solvency resolution, please contact us for more information.

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