Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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If you run a company in New Zealand, “solvency” isn’t just an accounting word - it’s one of the key legal ideas behind how directors make decisions, protect creditors, and keep the business operating responsibly.
A solvency statement often comes up when you’re doing something “corporate” (like issuing shares, buying back shares, giving financial assistance, or paying a dividend). It can feel a bit intimidating, especially if you’re a small business owner who just wants to get on with running the business.
Don’t stress - once you understand what a solvency statement is, when you might need one, and what it means for you as a director, it becomes a lot more manageable. In this guide, we’ll break it down in plain English and explain the practical steps you should take before signing anything.
What Is A Solvency Statement (And Why Does It Matter)?
A solvency statement is a formal statement made by a company’s directors confirming that, in their opinion, the company can pay its debts and continue operating.
In New Zealand, solvency statements commonly come from requirements under the Companies Act 1993. They’re used as a safeguard: when a company is about to do something that could affect its financial position (or the position of creditors), the law often requires directors to pause, assess solvency, and record that assessment.
From a small business perspective, a solvency statement matters because:
- It’s a director responsibility - directors can’t treat it as a box-ticking exercise.
- It’s designed to protect creditors (and the wider market) from companies taking money or value out when they can’t afford to.
- It can create personal risk if directors sign a statement without reasonable grounds.
- It’s often part of common transactions like a share buyback or shareholder distribution.
Even if your accountant is heavily involved, the final call is still on the directors - so it’s worth understanding what you’re signing.
Solvency Statement vs Solvency Certificate vs Solvency Declaration
People often use these terms interchangeably. In practice:
- Solvency statement is the term most commonly used in the Companies Act context (a statement by directors about solvency).
- Solvency certificate is sometimes used informally to describe a written confirmation of solvency (often still a solvency statement in substance).
- Solvency declaration can refer to a declaration-style document confirming solvency, depending on the transaction and the drafting approach.
The label matters less than the substance: it’s a formal director sign-off that you have assessed solvency and believe the company can meet its obligations.
What Does “Solvent” Mean Under NZ Company Law?
Under New Zealand company law, solvency is not just “we’ve got money in the bank right now”. There are generally two parts to the solvency assessment (often called the solvency test):
- Liquidity test - can the company pay its debts as they become due in the normal course of business?
- Balance sheet test - does the value of the company’s assets exceed the value of its liabilities (including contingent liabilities)?
In other words, solvency is about your ability to pay - not just your profit, turnover, or optimism about future sales.
Why This Can Be Tricky For Small Businesses
Small businesses often have features that make solvency more nuanced, for example:
- Seasonal cashflow (where some months are strong and some are tight)
- Debt tied to one contract or customer
- Personal guarantees (which can blur the line between company risk and personal risk)
- Directors who are also shareholders and employees (so drawings and wages sit alongside dividends)
That’s exactly why solvency statements exist - they force you to look at the full picture before approving certain transactions.
When Do NZ Companies Need A Solvency Statement?
A solvency statement is required for some company actions, particularly where money or value may be leaving the company, or where the company is rearranging its capital structure. Exactly when one is required depends on the type of transaction, the Companies Act requirements, and sometimes your constitution or shareholder arrangements.
Common situations where a solvency statement may be required include:
- Distributions to shareholders (including dividends)
- Share buybacks
- Financial assistance (where a company helps someone buy its shares, such as funding or guaranteeing the purchase)
- Reducing share capital or other capital structure changes
- Amalgamations or reorganisations (in some structures)
Not every business decision needs one. But when you’re doing something that affects shareholders’ equity or potentially impacts creditors, it’s a common legal checkpoint.
Example: Paying A Dividend When Cashflow Is Tight
Imagine your business had a great year on paper - strong revenue, good margins - but you’re still waiting on a few large invoices. You want to pay a dividend to shareholders now, because “the profit is there”.
This is where solvency becomes real. If paying that dividend means you can’t pay suppliers, rent, PAYE, or GST when due, the company may fail the solvency test - and that’s exactly what the law is trying to prevent. You should also confirm the accounting and tax treatment (including PAYE/GST timing and dividend implications) with your accountant or tax adviser before making or documenting any payment.
Example: Buying Back Shares From A Co-Founder
It’s also common when someone exits the business. If the company is buying back their shares (rather than the remaining shareholders buying them personally), directors will generally need to assess solvency and follow the relevant Companies Act process before approving the buyback.
This is also where good shareholder planning helps - your Shareholders Agreement can set out exit rules, pricing mechanisms, and what happens if the company can’t legally fund a buyback.
Who Signs The Solvency Statement, And What Are Directors Actually Confirming?
Generally, a solvency statement is signed by the directors who vote in favour of the relevant action (for example, the distribution or share buyback). The exact signing requirements depend on the transaction, the Companies Act process, and how your company is governed.
By signing, directors are usually confirming that:
- They’ve considered the company’s financial position
- The company can pay its debts as they fall due
- The company’s assets exceed its liabilities (including contingent liabilities)
- They have reasonable grounds for that opinion
That last point is the big one. You’re not expected to predict the future perfectly - but you are expected to take reasonable steps, use proper information, and act carefully.
What Counts As “Reasonable Grounds”?
There’s no single checklist that fits every company, but “reasonable grounds” typically means directors should consider things like:
- Up-to-date management accounts (not just last year’s financials)
- Cashflow forecasts (including “worst case” scenarios)
- Bank statements and funding facilities (and any covenants)
- Aged receivables (how much money is overdue and realistically collectible)
- Upcoming liabilities (rent, payroll, tax, suppliers, loan repayments)
- Contingent liabilities (for example, potential disputes, warranties, guarantees)
If you’re not sure what documents you should be relying on, this is a great time to get legal and accounting advice aligned. It’s also worth checking whether your Company Constitution adds extra rules about approvals, director decisions, or shareholder sign-off.
What Are The Risks Of Signing A Solvency Statement If The Company Isn’t Solvent?
A solvency statement is not just a formality. If directors sign when there aren’t reasonable grounds, the consequences can be serious.
Risks can include:
- Director liability - directors may be personally exposed if their decisions breach legal duties.
- Clawback risk - certain payments (like unlawful distributions) may need to be repaid.
- Creditor disputes - creditors may challenge transactions that occurred when the company was insolvent or near-insolvent.
- Reputation and commercial impact - banks, suppliers, and investors may lose confidence if governance is sloppy.
Directors in NZ have core duties under the Companies Act 1993, including acting in good faith and in the best interests of the company, and not allowing the business to trade recklessly. A solvency statement sits right at the intersection of those duties and your company’s financial reality.
Solvency Statements Don’t Replace Good Governance
One of the most common mistakes we see in small businesses is treating solvency as something you only think about when an accountant asks for a signature.
In reality, solvency should be part of your regular governance habits - alongside properly documenting decisions through resolutions, keeping shareholder records up to date, and maintaining clear rules around ownership. If you’re changing who owns what (or how), that often ties into Changing Company Ownership considerations too.
How Do You Prepare A Solvency Statement (Practical Steps For Small Businesses)?
If you’ve been asked to sign a solvency statement, the goal is to get comfortable that:
- the company passes the solvency test; and
- you can show how you reached that conclusion.
Here’s a practical process that works well for many small NZ companies.
1. Confirm Why You Need The Solvency Statement
Start by identifying the transaction and the legal requirement. Are you doing a dividend, a share buyback, a financial assistance arrangement, or something else?
This matters because the timing, approvals, and paperwork often differ depending on the action.
2. Check What Approvals Are Required
Some actions require:
- a directors’ resolution
- a shareholders’ resolution
- both
If you’re documenting decisions, make sure your company’s paperwork is consistent and properly executed. For example, if you’re using a resolution, it should be done cleanly and kept with company records - and if your directors are making key decisions, it can help to formalise this with a Directors Resolution that matches your governance rules.
3. Gather The Financial Information You’ll Rely On
Even if your accountant is involved, you should ask for (and keep) the core information you rely on. Common supporting documents include:
- recent profit and loss statement
- recent balance sheet
- cashflow forecast for at least the next 3–6 months
- details of any loans, overdrafts, or repayment schedules
- details of any unusual expenses coming up (equipment purchases, tax bills, bonuses)
If your business is growing quickly, this step is especially important - growth can be profitable but still create cashflow pressure.
4. Stress-Test Your Cashflow
A practical way to assess solvency is to ask:
- What happens if our biggest customer pays 30 days late?
- What happens if we lose one key contract next month?
- What happens if we have a product return issue or a dispute?
This kind of thinking isn’t pessimistic - it’s responsible. Directors are expected to consider foreseeable risks, not just best-case scenarios.
5. Make Sure The Legal Document Matches The Transaction
Different transactions require different supporting documents. For example:
- A share buyback might involve a buyback offer process and share transfer steps.
- A capital raising might involve issuing new shares and updating registers.
If you’re issuing or moving shares, the paperwork needs to line up properly with the transaction so the company’s records remain accurate. That can include steps around Transferring Shares if the ownership is changing hands, or a buyback structure if the company is repurchasing them.
6. Keep Records Of The Decision-Making
One of the simplest ways to protect yourself as a director is to keep good records. If anyone ever asks, “why did you think the company was solvent at the time?”, you want to be able to point to:
- the financial reports you reviewed
- any forecasts or assumptions
- board minutes or written resolutions
- professional advice you received
This is also part of building strong legal foundations - good paperwork now saves major headaches later.
Key Takeaways
- A solvency statement is a formal director statement that the company can pay its debts and that its assets exceed its liabilities, and it is required under the Companies Act 1993 for certain transactions.
- Solvency usually involves both a cashflow (liquidity) assessment and a balance sheet assessment, not just whether the business is profitable.
- Solvency statements commonly come up when paying distributions (including dividends), doing share buybacks, giving financial assistance, or changing capital structure (though the exact requirement depends on the transaction and legal structure).
- Directors should only sign a solvency statement if they have reasonable grounds, supported by up-to-date financial information and a realistic view of upcoming liabilities and risks.
- Signing a solvency statement without reasonable grounds can create serious legal and commercial risk, including potential director liability and clawback of unlawful payments.
- Good governance (proper resolutions, accurate share records, and clear company rules) makes solvency decisions easier and helps protect the business as it grows.
If you’d like help preparing the right documents for a transaction that involves a solvency statement - or you just want peace of mind that your approvals and paperwork are done properly - reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
