Reductions in Share Capital Under the Companies Act 2006

8/11/2019 Reductions in Share Capital Under the Companies Act 2006

1/5

Reductions in share capital under the Companies Act 2006

Written by Nigel Stanford

The Companies Act 2006 has introduced a new procedure for reductions in the share capital of private

companies. This article summarises the new procedure.

1 Introduction

A new procedure, both cheaper and simpler than its predecessor, has been introduced so that a private

company can reduce its share capital by passing a special resolution supported by solvency statements

from the company's directors. The existing court based procedure will still be available but it is widely

thought that the formal, slow and cumbersome nature of the court process, (as well as the not

insignificant professional fees that were involved) previously discouraged many companies from

undertaking a reduction of share capital.

2 How can a private company reduce its share capital?

From 1 October 2008, to reduce its share capital a private company limited by shares can either:

Option 1: pass a special resolution and apply to court for confirmation of the reduction (creditors of

the company have certain statutory rights to object to the reduction of share capital during the court

process); or


2/5

Option 2: pass a special resolution supported by a solvency statement made by all ofits directors and

deliver certain documents (listed below) to Companies House, without requiring a court process (the

Solvency Statement Procedure).

A private company limited by shares can use the Solvency Statement Procedure unless its memorandum

or articles of association prohibit a reduction of share capital (i.e. express authority is not required).

3 What does the Solvency Statement Procedure require?

3.1 Special resolution to be passed by the shareholders of the company

If the special resolution is passed as a written resolution, the solvency statement (see below) must besent with it to each shareholder entitled to vote on it (otherwise an offence is committed by the

company and its officers).

If the special resolution is proposed ata general meeting, the supporting solvency statement must be

available for inspection throughout that general meeting.

3.2 Solvency statement to be made by each director of the company

There is no right for a creditor to object to a reduction of capital supported by a solvency statement.

However the solvency statement does protect the creditors of the company by requiring that all the

directors give the solvency statement and take all the company's liabilities into account (including

prospective and contingent liabilities) when doing so. Therefore, if one or more of the directors is


3/5

unable or unwilling to make the solvency statement, the company will not be able to use the Solvency

Statement Procedure for its reduction of capital and will need to use the court approved procedure

(unless the relevant directors who object resign prior to the making of the statement).

The content of the solvency statement is prescribed by the companies act. It cannot be qualified in

anyway.

The solvency statement mustbe made not more than 15 days before the date on which the special

resolution is passed.

Before making the statement, each director must very carefully consider the companys financial

position and the effect of the proposed reduction of share capital. Directors can decide to rely on an

internal review of the company's financial position or they can ask the auditors to prepare an

independent assessment of its financial position.

An offence is committed by a director if he makes a solvency statement without reasonable grounds

for the opinions expressed in it. The maximum penalty for each director in default is imprisonment for aterm not exceeding two years or an unlimited fine (or both).

3.3 Statement by directors

Between the date of passing of the special resolution and it being sent to Companies House, the

directors must sign a statement confirming compliance with the statutory requirements as follows:

the solvency statement was made not more than 15 days before the date on which the special

resolution was passed, and

the solvency statement was circulated with the written resolution OR made available for inspection at

the general meeting.

3.4 Memorandum of capital

A memorandum of capital must be sent to Companies House which sets out:

the amount of the companys share capital (as reduced),


4/5


5/5

Any reserve that arises from a reduction of share capital using the Solvency Statement Procedure

(subject to any contrary provision contained in the special resolution or the company's constitutional

documents) is distributable and, therefore, may be treated as a distributable reserve and is treated as a

realised profit under Part 23 CA 2006.

A company may have capital which is surplus to its requirements and which it therefore wishes to return

to shareholders. The Solvency Statement Procedure can also be used in such instances: a reduction of

share capital will not give rise to a reserve (whether distributable or otherwise) if it is structured as a

direct return of capital to shareholders for example by cancelling some shares entirely or by reducing

the nominal value of each share and paying the difference between the original nominal value and the

reduced nominal value to the affected shareholders.

Furthermore a distributable reserve arising on a reduction of share capital using the Solvency Statement

Procedure does not necessarily need to be distributed to shareholders: where a company has a deficit

on its profit and less account and a reduction of share capital using the Solvency Statement Procedure

creates a distributable reserve, this reserve may be used to offset or reduce such deficit.

Nigel Stanford

Partner

January 2009

Reductions in Share Capital Under the Companies Act 2006

Documents

Transcript of Reductions in Share Capital Under the Companies Act 2006