When the directors of a company place a company into a solvent liquidation (“MVL”) they have to make a statutory declaration of Solvency in front of a solicitor which states that “….having made a full inquiry into the company’s affairs and that, having done so, they have formed the opinion that the company WILL be able to pay its debts in full together with interest within 12 months from the commencement of the winding up!”
If the directors make the statutory declaration without having reasonable grounds for doing so, they are liable for a prison sentence of up to two years and an unlimited fine
There was recently a case where there was an overdrawn director’s loan account of £250k and external creditors of £100k at the commencement of the solvent liquidation. When making the statutory declaration of solvency, the director may have intended to repay his DLA but during the course of the first 12 months of the liquidation was unable to do so. Consequently, the liquidator converted the solvent liquidation into an insolvent liquidation. This now exposes the firecotr to potential criminal prosecution and the liquidator is now pursuing the director for his DLA.