Company Law Solutions provides expert assistance and guidance to help companies conduct administrative reductions of capital. If your company needs to reduce its share capital, whatever the reason may be, our experienced team will help you through the entire process, ensuring that it is done in a legally compliant way with all the necessary documentation being drafted bespoke for your company.
Contact us today to find out how our experienced team of legal experts can assist your company with its reduction of capital.
What Is A Reduction of Capital?
A reduction of capital is a means by which a company can reduce the number of shares it has in issue, and return the capital invested in them to its shareholders. While it used to be the case that all reductions of share capital required the company to obtain a court order (and this is still the case for public companies), private companies can reduce their capital without one by using a procedure introduced in the Companies Act 2006 known as an 'administrative reduction of capital' (which is the type of reduction to which this page refers). The process is distinct from, but has a similar effect to, an off-market repurchase of shares (also known as a ‘share buyback’).
Why Would A Company Implement A Reduction of Capital?
A reduction of capital might be carried out for various reasons. A company may simply wish to return capital to shareholders by cancelling shares (e.g. in circumstances where the capital isn’t needed by the company). Alternatively, it may wish to cancel share capital which is lost or unrepresented by its assets (e.g. a company with an issued capital of 1,000 £1 shares, but which has traded unsuccessfully such that its assets are only worth £500, may wish to reduce its capital to match its asset value by writing 50 pence off each £1 share). Companies can also use the process to cancel or reduce a capital redemption reserve on its balance sheet.
A reduction of capital is also a very useful tool to extinguish shareholders' liability on shares which are not fully paid. A surprisingly common example of this in practice is where a company is set up by someone who decides that it would be a good idea to issue themselves a million £1 shares - not realising that doing so creates a liability on their part to pay that million pounds into the company's bank account. Reducing the capital of the company to, say, £1 removes this liability (which can have very real financial consequences).
Ensure Compliance with Regulations When Reducing Your Company's Capital
Where a company wishes to carry out an administrative reduction of capital, the reduction must be proposed by the directors and approved by the shareholders. The directors must also make a statement of solvency. This is a formal statement, registered at Companies House, that they have enquired into the company's affairs and that, in their opinion, the company is able to pay its debts and will be able to do so for the following 12 months.
The Consequences of a Reduction of Capital
Performing a reduction of capital may have tax consequences for the company and/or its shareholders. We do not give tax advice and strongly recommend that advice from the company's accountants is sought before proceeding.
In addition, prior to proceeding the directors should consider carefully whether making a statement of solvency is justified in all the circumstances. Doing so without reasonable grounds is a serious criminal offence.
The Company Law Solutions service provides everything required to be legally compliant, including:
- guidance as to the applicable procedures for the particular reduction of capital
- directors' statement of solvency
- minutes of directors' meetings
- notices of shareholders' resolutions
- shareholders' consents to resolutions
- completed documents and official forms for Companies House
- our straightforward, step by step guide to completing the procedures
|Reduction of capital
|From £300.00 + VAT
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