Reductions of Share Capital
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Reasons why a company may choose to reduce its capital
A company may choose to reduce its share capital for several reasons; two examples are to:
- Increase its distributable reserves – The reserve arising from a reduction is treated as realised profit and capable of immediate distribution to all the members.
- Return surplus capital – This could be to release the liability to pay up on any unpaid or partially paid shares, or to repay fully paid share capital.
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Preliminary Considerations
Before going through the procedure companies should check, amongst other things, that there is no prohibition in their Articles of Association. In addition, companies should check to see if their bank or other facility provider requires notice.
Procedure for Reducing Share Capital Supported by a Directors Statement
A special resolution of the members is required, supported by a written solvency statement of the directors.
The directors must not make the statement more than 15 days before the resolution is passed, and both forms together with a statement of capital must be filed at Companies House.
To make the statement, each of the directors must consider the financial state of the company. They must be of the opinion that the company can pay its debts, and will trade as a going concern for the next 12 months.
If the directors make the statement without reasonable grounds to do so they may commit a criminal offence. There are some practical steps to take to avoid this, including:
- Record the information relied on to form the opinion using detailed board minutes which consider directors’ duties, the benefit to the company and the effect on net assets.
- Consider potential threats to the company such as the loss of a key customer or supplier.
- Reports from third parties – There is no requirement to have an auditors report, but it may give comfort to do so.
Maintenance of Capital
In reducing share capital a company must always consider one of the main principals of English company law that the share capital of a company belongs to the company and not the shareholders. This is designed to protect creditors who can as a last resort claim against the company’s share capital.
Accordingly, a company may only use one of the statutory procedures for reducing its share capital, and may only make distributions to its members from its distributable profits.
Shane Morris advises on company commercial matters, and can be contacted on +44 (0)20 7749 2700 or scm@silvermansherliker.co.uk. |
