A company may generally reduce its share capital in any way. In particular, a company may do so by cancelling or reducing the liability on partly paid shares, repaying any paid-up share capital in excess of the company’s wants, or cancelling any paid-up share capital that is lost or unrepresented by available assets.
This article explores some of the most common reasons for a reduction of share capital and the procedure for carrying one out.
Reasons for reducing share capital
A reduction of share capital may be considered by companies for various reasons. Commonly, it is carried out for one of the following purposes:
- To create distributable reserves – for use towards payment of a dividend to shareholders or to finance a purchase of the company’s own shares, where there are otherwise insufficient distributable profits.
- To pay surplus capital back to shareholders – if a company has surplus cash or assets, it may decide to cancel shares in return for cash or non-cash assets (such as property) with a book value in the amount of the reduction.
- Structuring a de-merger – if a company intends to carry out a de-merger, a reduction in capital can be used as a means of hiving out the relevant business or assets of the company.
How to carry out a reduction of capital for private companies
The procedure for carrying out a reduction of capital is slightly different for private and public limited companies.
A private company limited by shares may reduce its share capital (as long as a reduction is not prohibited by its articles of association and (after the reduction) it will not be left with only redeemable shares in issue) by one of the following two methods:
- Special resolution supported by a solvency statement
In this case, the first requirement is for a solvency statement from the directors. A solvency statement is a statement which confirms that each of the directors has formed the opinion, having taken into account all of the company’s liabilities (including any contingent or prospective liabilities):
- that there is no ground on which the company could be found unable to pay (or otherwise discharge) its debts as at the date of the statement; and
- that the company will be able to pay (or otherwise) its debts as they fall due during the next 12 months (or, if there is an intention to wind up the company within the year from the date of the statement, then that the company will be able to pay (or otherwise discharge) its debts within 12 months of the commencement of the winding up).
A copy of the solvency statement must be (where the resolution to approve the reduction of capital is proposed as a written resolution) sent to the eligible shareholders no later than when the written resolution is sent to them, or (where the resolution is proposed at a general meeting) made available for inspection by the shareholders throughout the general meeting.
The next requirement is that the special resolution approving the reduction of capital must be passed within 15 days after the date of the solvency statement. When passed, a copy of the special resolution and the solvency statement must be delivered to Companies House together with a statement of capital, within 15 days after the resolution.
The above steps assume a company only has one class of shares in issue and that there are no other requirements in its articles of association, shareholders agreement or other binding arrangement. In the event any of these assumptions do not apply, additional authorities, consents and procedures may also be necessary.
It is important that directors are fully informed and advised before issuing a solvency statement, as it is a criminal offence punishable by a fine or imprisonment (or both) if a director makes a statement (which is delivered to the registrar of companies) without having reasonable grounds for the opinions expressed in it.
- Special resolution confirmed by the court
In the alternative, a private limited company may reduce it capital by passing a special resolution to that effect (either as a written resolution or at a general meeting) and successfully applying to the court confirming the reduction.
In these circumstances, creditors of the company are entitled to object against the reduction of capital if they can show there is a real likelihood the reduction would result in the company being unable to discharge the creditor’s debt or claim when it fell due, or if the creditor is entitled to a debt or claim that would be admissible in proof against the company at the date fixed by the court, if that date were the commencement of a winding up of the company.
If the court is satisfied that, for every creditor entitled to object to the capital reduction, either they have consented to the reduction or their debt or claim has been discharged, determined or secured, then the court may make an order confirming the reduction of capital on such terms and conditions as it thinks fit.
Where the court confirms the reduction, it may order the company to publish the reasons for the reduction of capital or other related information with a view to properly informing the public, and the causes that led to the reduction.
A copy of the court order confirming the reduction must be filed at Companies House together with a statement of capital, and the resolution to reduce the share capital becomes effective once those documents have been delivered to Companies House.
An officer of the company will commit an offence punishable by a fine if they are involved in any intentional or reckless concealment (from the court) of a creditor entitled to object to the capital reduction, or misrepresentation of the nature or amount of the debt or claim of a creditor.
How to carry out a reduction of capital for public companies
The ability of a public limited company to reduce its share capital is more controlled than it is for private limited companies. The only option for a public company wanting to carry out a reduction is by a special resolution confirmed by the court.
Whilst the principles and processes (for a special resolution confirmed by the court) described earlier in this article apply equally in the case of public companies, there are certain additional considerations that should also be considered:
a public company cannot pass resolutions by written resolution. Accordingly, a general meeting of the shareholders would need to be convened in order to propose and consider the resolution; and
if the court makes an order confirming the capital reduction, which brings the nominal value of the company’s issued share capital below the authorised minimum for public companies (currently £50,000), then the Companies House will not register the order unless specifically directed by the court or the company first re-registers as a private company.
This article is provided for general information only and is not intended to be nor should it be relied upon as legal advice in relation to any particular matter. If you require specific legal advice on any issue relating to share capital reductions or corporate law, we at Burlingtons Legal LLP will be able to assist. Please contact us on +44 (0)20 7529 5420 or fill out the form below to arrange a consultation.