General
This is another exception to the doctrine of maintenance of share capital.
A limited company having a share capital may reduce its share capital:
(a) in the case of a private company limited by shares, by special resolution supported by a solvency statement (see ss.642 to 644 CA 2006);
(b) in any case, by special resolution confirmed by the court (see ss. 645 to 651 CA 2006).
There are a variety of reasons why a company might wish to reduce its share capital:
- it may wish to create distributable reserves, which increases its ability to pay dividends;
- it may have surplus capital which it wishes to return to its shareholders;
- there may have been a substantial reduction in the value of the assets of the company with the result that the share capital of the company is no longer representative of the true value of the assets of the company;
- so the company can carry out a redemption of its redeemable shares or purchase of its own shares where it does not have sufficient distributable reserves to redeem or buy back the shares; or
- it may form part of a ‘scheme of arrangement’ which is a method of structuring mergers and acquisitions.
In such cases, the company can agree to reduce its capital by special resolution, but, unless the company is a private company, the resolution is not effective unless confirmed by the court, on petition by the company.
Section 654 CA 2006 states that any reserve arising from the reduction of capital is not distributable without the consent of the Secretary of State. The Companies (Reduction of Share Capital) Order 2008 provides that (subject to anything to the contrary in the shareholder resolution relating to the reduction or anything in the company’s articles) if a private company reduces its share capital supported by a solvency statement but does not apply for a court order confirming the reduction, then the reserve will be treated for the purposes of Part 23 CA 2006 (which deals with distributions) as a realised profit. The position is slightly different if a private company reduces its share capital and the reduction is confirmed by the court – in such a scenario the reserve will be treated as realised profit for the purposes of Part 23 CA 2006 unless the court orders otherwise.
The key stages of a reduction of capital using the court procedure are as follows:
Preliminary Stage
Check the articles of the company – a reduction of capital must not be restricted or prohibited by the articles (s.641(6) CA 2006).
Stage One
A timetable for the reduction needs to be agreed by the court. Three key dates need to be agreed:
- the date by which the petition must be presented to court;
- the date of the directions hearing; and
- the date of the petition hearing.
Stage Two
A special resolution must be passed approving the reduction of capital.
Stage Three
Once the special resolution has been passed, the company can present the petition to the court. The company will also issue an application notice setting out directions to be sought from the court at the directions hearing.
Stage Four
The petition must be supported by either a witness statement or an affidavit of the chairman of the general meeting when the special resolution was passed.
Stage Five
The directions hearing will take place at which the court will consider the position of the creditors. The court will not confirm a proposed reduction of capital unless it is satisfied that the interests of all the company’s creditors who are entitled to object to the proposed reduction are not adversely affected by the proposal. The court will also want to check that the appropriate approvals and consents have been obtained. Normally the court will provide for the advertisement of the petition in a broadsheet newspaper. The advertisement will be placed in a broadsheet seven days before the date that has been fixed for the hearing of the petition.
Stage Six
The Companies Court Registrar will hear the petition to reduce the capital in open court.
Stage Seven
The reduction will become effective once the court order and a statement of capital have been registered at Companies House. The registration of the order will then be advertised in a broadsheet newspaper. It is important to be aware that in certain situations creditors may have the right to object to the reduction and if the reduction affects separate classes of shareholders differently, there may be issues with class rights under s.630 CA 2006.
Reduction of capital by private companies under the solvency statement procedure
Under the CA 2006 there is also a non-court procedure for private companies only to reduce their capital. The availability of the procedure is subject to any restriction or prohibition in the company’s articles. The company cannot use the procedure if, following the reduction of capital, only redeemable shares will be in issue or the issued share capital will be reduced to zero (s.641(2) CA 2006). In addition, the company should ensure that one person will not end up holding all of the shares (unless the conditions in s.641(2B) CA 2006 are met.
The procedure is set out in ss.642-644 CA 2006. The company’s shareholders are required to pass a special resolution to reduce capital and the directors have to sign a statement of solvency. The special resolution must be passed within 15 days of the date that the directors’ solvency statement is made.
Within 15 days of the resolution being passed, the company must file the special resolution, the solvency statement and a statement of capital at Companies House. The resolution cannot take effect until these documents are registered. Note that there is no requirement for the directors’ statement to be supported by an auditors’ report, unlike a redemption/purchase out of capital.
An advantage of seeking the court’s approval of a reduction of capital is that, once confirmed by the court, the procedure cannot be challenged. In addition, as each director needs to make the solvency statement, if any director refuses to do so, the court procedure will need to be followed (unless the director resigns). However the court procedure will take longer and be more expensive.