An administrative reduction of share capital can be useful for many reasons.
A reduction of capital is a means by which a company can reduce the number of shares it has in issue. 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. The process is distinct from, but has a similar effect to, an off-market repurchase of shares (also known as a ‘share buyback’).
Reasons for reducing share capital
A capital reduction can be useful where a company wishes to:
- return capital to shareholders by cancelling shares (e.g. where the capital isn’t needed by the company);
- reduce the nominal value of each share;
- cancel share capital which is lost or unrepresented by 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);
- extinguish shareholders' liability on shares which are not fully paid; or
- cancel or reduce a capital redemption reserve.
Where a company wishes to reduce its capital without obtaining a court order, 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. Making a statement of solvency without reasonable grounds is a serious criminal offence.
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.
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||Quote|
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