Company Solvency Resolutions
Why Every Australian Company Must Sign an Annual Solvency Resolution
Running a company in Australia comes with a host of legal and financial responsibilities. Among the most critical and often overlooked is the requirement for directors to pass an annual solvency resolution. This isn’t just a box-ticking exercise. It’s a legal obligation under the Corporations Act 2001 (Cth) and a vital tool for ensuring financial accountability and business sustainability.
What Is a Solvency Resolution?
A solvency resolution is a formal declaration made by a company’s directors stating whether, in their opinion, the company can pay its debts as and when they fall due. This resolution must be passed within two months of the company’s annual review date, unless the company has lodged a financial report with ASIC in the previous 12 months.
There are two types of solvency resolutions:
Positive resolution: The directors believe the company is solvent.
Negative resolution: The directors believe the company is not solvent.
If a negative resolution is passed or if no resolution is passed at all ASIC must be notified using ASIC Form 485 within seven days.
Why Is It So Important?
Section 347A of the Corporations Act mandates that directors must pass a solvency resolution annually. Failing to do so is a breach of the Act and may result in penalties, compliance notices, or even deregistration of the company.
What Happens If You Don’t Sign a Solvency Resolution?
Failing to pass a solvency resolution within the required timeframe can lead to:
Late fees and penalties from ASIC
Increased scrutiny or audits
Personal liability for directors if the company trades while insolvent
Potential deregistration of the company for ongoing non-compliance
How to Complete a Solvency Resolution
Here’s a step-by-step guide:
Receive your annual statement from ASIC.
Review company financial records including cash flow, liabilities, and assets.
Hold a directors’ meeting to discuss the company’s financial position.
Pass the resolution either positive or negative.
Record the resolution in the company’s records.
Notify ASIC within 7 days if the resolution is negative or not passed.
Final Thoughts
While it may not seem important at the time, if the company ever finds itself insolvent or under administration it may become particularly important for the company directors to have made a solvency resolution.
