Down with capital

One of the less noticed changes in the Companies Act 2006 has been the creation of easier ways to reduce share capital in a private limited company. This liberalisation may allow shareholders to withdraw capital reserves which may not be needed by the company itself.

Reasons to reduce share capital include:

  • when a company’s capital exceeds its needs.
  •  to eliminate a deficit on the profit and loss account.
  •  to create distributable reserves in order to be able to transfer assets or cash to shareholders.
  •  to create a fund to allow the company to redeem shares.

 In the past, limited companies wishing to reduce share capital required court approval . Although this system remains in place, private limited companies may now use a simplified non court-based procedure. This involves the production of a solvency statement under section 642 of the Act in which each of the directors state their belief that there are no grounds on which the company would be unable to pay or discharge its debts in the next 12 months, taking into account the liabilities of the company. The statement must be unqualified.

Great care needs to be taken in giving such a statement, since if the opinions contained in it are not reasonable, directors may face criminal sanctions. Directors should take informed accountancy advice and look carefully at statutory accounts, management accounts, cash flow forecasts and other risk indicators.

The statement needs to be accompanied by a special resolution by the members of the company and there are filing requirements at Companies House

The procedure is easier, quicker and cheaper than applying to court and provided the solvency statement is given, creditors may not object to the reduction in capital. Those directors with complex trading companies may, however, baulk at the risks of getting it wrong.

For more detailed information please contact Andrew Fleming on 01473 230033 or email arf@blockslegal.co.uk

The above is general comment only and individual advice should be taken.