It is a fundamental principle of law that a company should, except in limited circumstances, maintain its share capital.
This stems from the need to protect third parties dealing with a limited company against the risk that its assets could be spirited away, leaving nothing to support its debts. More recently, creditors have tended to rely less and less on the level of a company’s share capital as an indicator of its creditworthiness. In recognition of this shift in attitude, a new procedure to simplify reductions of share capital was introduced by the Companies Act 2006.
Distributal reserves
There are a number of reasons why it may be desirable for a company to reduce its share capital. The main driver is likely to be the effect on the company’s distributable reserves. A reduction of share capital creates a reserve which is immediately distributable as a realised profit. This is likely to be very attractive for companies that have large share capitals where historically carried-forward losses have prevented them from declaring any dividends or redeeming shares.
Before October 2008, limited companies seeking to reduce their share capital required the approval of the High Court. Unless large sums of money were involved, this could be a prohibitively expensive exercise, though it is still available for those who wish to use it. The new procedure avoids the need for court approval as it supports the reduction of share capital by way of a statement of solvency made by the directors.
The new system is a quicker, easier and cheaper option. Importantly, and in contrast to the court-approved procedure, there is no right for a creditor to object to a reduction of capital supported by a solvency statement.
The shareholders are required to pass a special resolution to reduce the company’s share capital once the directors have made a statement of solvency.
Criminal sanctions
Importantly, the directors face criminal sanctions if they make a solvency statement without having reasonable grounds for the opinions expressed in it. The nature and extent of the comfort that a board of directors will want before making a solvency statement depends on the circumstances of that particular company. It is incumbent on the directors, along with their professional advisers, to take a detailed look at the current and future finances of the company before carrying out the procedure.
Nevertheless, provided the company is in solid financial shape, the advantages of the new procedure are readily apparent: the professional costs will typically be a fraction of those involved with the court-approved procedure and it is a much shorter process.
For more information on share capital, please contact our commercial team.
Our legal experts have been busy sharing valuable expertise in their first series of free webinars for employers, and businesses across the county who missed the live events can now…
The Coronavirus Business Interruption Loan Scheme (CBILS) has thrown a much-needed lifeline to businesses experiencing cashflow difficulties as a result of the coronavirus outbreak. 17 December 2020 Today, Rishi Sunak…
The global outbreak of coronavirus (COVID-19) and the government’s resulting emergency measures have had severe implications for many businesses. Read on for answers to some frequently-asked questions on corporate &…
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept”, you consent to the use of ALL cookies.
This website uses cookies to improve your experience while you navigate through our website. Out of these cookies, the cookies that are categorised as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyse and understand how you use our website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies but it may affect your browsing experience on our website. You can find our cookie policy here.
Necessary cookies are absolutely essential for our website to function and enable core functionality such as security and accessibility. These cookies do not store any personal information. You can block these cookies by changing your browser settings, but this may affect how the website functions.
We use performance cookies such as Google Analytics to help us count the number of visitors and to see how visitors move around our website when they are using it. This helps us to improve the way our website works, for example, by ensuring that users are finding what they are looking for easily. The cookies collect information in a way that does not directly identify anyone. For more information on how these cookies work, please see our cookie policy.