Reduction of Share Capital – What You Need to Know

April 18, 2017 2:35 pm Published by

There are many advantages to using the 2006 Act “reduction of share capital” procedure via the solvency statement route. This procedure was introduced in the 2006 Companies Act to replace the court process which was expensive and time consuming and is now only used in limited circumstances. What you need to know:-

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  1. You can reduce share capital to a minimum of 1 issued share and the usual practice for share capital reductions is for them to be pro rata across all members. However, you can reduce separate share classes so the procedure can be used to reduce a single shareholder’s allocation if that shareholder has a separate class of shares. If only one class of share exists and the requirement is to reduce one person’s shareholding then either:
      • a reclassification of share capital will be required in advance of the reduction; or
      • You need to obtain unanimous shareholders approvals as not all shareholders are being treated equally; or
      • You need to put in place a compromise of arrangement whereby the share capital of the company is reorganised formally with a court order
  2. You can reduce the share premium account to zero
  3. You can reduce the capital redemption reserves and redenomination reserve to zero
  4. The capital can be paid back to the shareholders and must be repaid at par value. You cannot repay share capital at a premium or repay at less than the nominal value. The reduction of capital can also be used to cancel unpaid capital where shares have incorrectly been allotted or capital which is no longer required.
  5. The reserve arising from a reduction of capital, share premium or capital redemption reserve is treated as a realised profit and can therefore be used to increase the P&L reserves especially where a company has accumulated realised losses or simply to allow for additional distributable reserves for dividends, to fund a purchase of own shares or to simply strengthen the balance sheet.
  6. The reduction of capital route can be used to reduce capital and reserves before strike off
  7. The procedure to reduce will require the following:-
      • Special Resolution requiring 75% vote of the membership
      • Statement of Solvency signed by all Directors
      • Form SH19 Statement of Share Capital
      • £10 duty fee
  8. It would be necessary to check the Articles of Association to ensure no clause exist that prohibit a reduction of capital and if they do then the Articles will require updating.
  9. The “Statement of Solvency” is a unanimous statement of the directors of the company, that having reviewed all of the company’s liabilities (including any contingent or prospective liabilities) they have agreed that at the date of the statement there is no ground on which the company could be found to be unable to pay its debts and that the company will be able to pay its debts as they fall due during the year immediately following the date of the statement. If it is intended that the company be wound up within the coming year, the solvency statement must also confirm that such winding up is done on a solvent basis.
  10. If the Company has an appointed auditor then the auditor must also receive a copy of the special resolution at the same time as the shareholders.
  11. The Reduction of Capital will only be in effect on the date that the paperwork is filed and accepted at Companies House

Further advice can be detailed upon request.

Our fee for arranging a Reduction of Share Capital including forms duty  is £165.00 plus vat.

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This post was written by Adrian Smart

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