Why Solvency Statements Matter: Governance, Insolvent Trading Risk and Director Protection

Why Solvency Statements Matter: Governance, Insolvent Trading Risk and Director Protection

Why Solvency Statements Matter: Governance, Insolvent Trading Risk and Director Protection

Solvency statements are not just annual paperwork. For Australian directors, they are governance decisions that can later be tested against what the company knew, what the directors reviewed, and what evidence existed at the time.

That distinction matters whenever a business later enters administration, faces creditor pressure, or becomes the subject of reported insolvent trading questions. The issue is not simply whether a document was signed. The issue is whether the organisation can show the basis for the decision.

Recent media reporting about an Australian caravan manufacturer in administration, including reported debts and an alleged insolvent trading probe, is a timely reminder. This article does not make any legal conclusion about that matter. The broader governance lesson is simple: solvency related decisions need more than a template. They need a defensible evidence trail.

This article is general information only and is not legal advice.

In an Australian company context, solvency generally turns on whether the company can pay its debts as and when they become due and payable. A solvency statement or solvency resolution is a formal expression of directors' view about the company's ability to meet that test at the relevant time.

For many companies, solvency comes up during the ASIC annual review process. ASIC guidance says directors must pass a solvency resolution within two months of the annual review date unless the company has lodged a financial report with ASIC in the previous 12 months.

That requirement can look routine. It often appears beside other administrative steps: pay the annual review fee, check company details, update records if needed, and store the annual statement.

But solvency is not the same kind of task as paying an invoice. It asks directors to form a view about the company's financial position. That view should be grounded in current information, reasonable assumptions and a record of what was reviewed.

Why Solvency Is a Governance Decision, Not an Accounting Tick Box

The mistake is treating solvency as a form to complete after finance has done the accounts.

Finance information matters, but solvency is broader than a spreadsheet balance. Directors may need to consider cash flow, current and contingent liabilities, trading conditions, funding availability, creditor pressure, tax obligations, customer concentration, debt facilities, known disputes, board decisions and forward looking assumptions.

Can the company prove what the directors relied on when they formed their view?

That proof can become important later. If the company continues trading and later enters administration, questions may be asked about when financial distress became apparent, what directors knew, what they should reasonably have known, and what actions were taken.

Strong governance does not guarantee a business avoids failure. Businesses fail for many reasons. But strong governance can help show that directors took their responsibilities seriously, reviewed relevant information and made decisions through a controlled process.

What Directors Need Before Approving Solvency Related Decisions

Before directors approve a solvency statement or related decision, the company should be able to assemble a practical evidence pack.

That evidence pack will vary depending on the business, but it often includes:

Current management accounts Cash flow forecast Aged payables and receivables Loan, facility and covenant information Tax and superannuation obligations Known creditor claims or disputes Board papers or finance reports Material assumptions behind forecasts Any external accountant, adviser or auditor input Prior board decisions affecting cash flow Evidence of director review and approval

The point is not to create paperwork for its own sake. The point is to make sure the directors' decision is connected to the information that supported it.

If the decision is approved by circulating resolution, the record should show the version approved, who approved it, when they approved it, and where the supporting information was stored.

If the decision is made in a meeting, the minutes should capture the key materials reviewed and the basis of the directors' view without pretending to be a legal opinion.

The Evidence Checklist for Solvency Governance

A sound solvency governance process should answer seven questions.

The company should be able to identify the financial and operational information directors reviewed.

This may include management accounts, cash flow forecasts, creditor reports, debt facility details, tax positions, trading updates and any material risks affecting the company's ability to pay debts when due.

A vague record that says "the directors considered solvency" is weaker than a record that identifies the specific papers, reports or data reviewed.

Solvency decisions are time sensitive. A forecast prepared weeks earlier may no longer reflect the current position if sales have dropped, funding has changed, a major customer has delayed payment, or new liabilities have emerged.

Governance teams should record the date of the source information and whether any material updates were considered before approval.

Many solvency decisions involve assumptions: revenue timing, debtor collections, creditor payment plans, refinancing, capital raises, cost reductions, asset sales or parent company support.

Those assumptions should be visible. If the company relies on a cash flow forecast, directors should be able to see the key assumptions behind it.

4. Who Reviewed and Approved the Decision?

For each solvency related decision, the company should know:

Which directors reviewed the materials Whether any director asked questions Whether further information was requested Who approved the resolution When approval was given Whether the decision was unanimous or conditional

In a multi entity group, this matters even more because different entities may have different boards, different financial positions and different obligations.

5. Where Is the Supporting Evidence Stored?

The evidence should not live only in an inbox.

If documents are scattered across email, shared drives, finance folders, board portals and external adviser systems, the company may struggle to reconstruct the decision later.

A governance system of record should link the solvency decision to the relevant entity, review year, documents, approvals and supporting evidence.

Solvency is not always a once a year question. If circumstances change materially, directors may need to revisit the company's position.