Solvency certificate: Overview, definition and example
What is a solvency certificate?
A solvency certificate is a formal document provided by a company’s authorized representative, typically the chief financial officer (CFO) or another senior officer, to certify that the company is financially solvent. It confirms that, after a particular transaction (such as a loan, merger, or dividend payment), the company will be able to meet its financial obligations as they come due and that its total assets exceed its total liabilities.
Solvency certificates are often required in financing agreements, mergers and acquisitions, or significant corporate transactions to assure lenders, investors, or other stakeholders of the company’s financial health and stability.
Why is a solvency certificate important?
A solvency certificate is important because it provides assurance to counterparties, such as lenders or investors, that a company is in a strong financial position to meet its obligations. For lenders, it reduces the risk of default by confirming that the borrower remains solvent after the transaction. For companies, issuing a solvency certificate demonstrates financial transparency and compliance with contractual or regulatory requirements.
Including a solvency certificate in transactions helps protect all parties involved by ensuring financial due diligence and minimizing potential disputes or liabilities related to insolvency claims.
Understanding a solvency certificate through an example
Imagine a company secures a $10 million loan from a bank to fund a new project. As part of the loan agreement, the company is required to provide a solvency certificate signed by its CFO, stating that the company remains solvent and has sufficient assets to cover its liabilities even after taking on the loan.
In another example, during a merger between two corporations, the acquiring company is required to provide a solvency certificate to reassure the target company’s shareholders and regulatory authorities that the acquisition will not lead to financial instability for the combined entity.
An example of a solvency certificate clause
Here’s how a solvency certificate clause might appear in an agreement:
“As a condition precedent to the closing of this Agreement, the Borrower shall deliver a Solvency Certificate, duly executed by its Chief Financial Officer or other authorized officer, certifying that, after giving effect to the transactions contemplated herein, the Borrower and its subsidiaries on a consolidated basis will remain solvent, able to pay their debts as they become due, and will have total assets exceeding total liabilities.”
Conclusion
A solvency certificate plays a critical role in major financial transactions, ensuring transparency and confidence in a company’s financial health. By certifying solvency, companies demonstrate due diligence, minimize risks for stakeholders, and support compliance with legal and contractual obligations. Including a solvency certificate provision in agreements helps protect all parties and ensures a smooth and reliable transaction process.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.