A reduction of capital is a process whereby a company chooses to reduce its total amount of share capital. This can be achieved in a variety of ways, such as reducing the nominal value of existing shares, the amount paid up on those issued shares, or the total number of shares in issue.
Below, we explore this topic in further detail, including the most common reasons why a limited company would reduce its share capital and the appropriate procedure for doing so.
Reducing capital in a UK limited company
In a limited company, the capital – or share capital – is the amount of money that shareholders (members/owners) invest in the business in exchange for shares in the business.
Therefore, a reduction of capital is a reduction of the amount of money invested in a company’s issued shares. It can be a complex procedure, and care must be taken to ensure any such reduction is in accordance with the Companies Act 2006, the articles of association, and any shareholders’ agreement that may be in place.
Why would a company reduce its share capital?
Companies reduce their share capital for a number of different reasons. Most commonly, a reduction of capital is carried out to:
Create distributable reserves
If a company has accumulated losses and/or has insufficient distributable profits to pay dividends to shareholders, it can carry out a reduction of capital to cover those losses and/or create distributable reserves for dividend payments.
Return surplus capital to members
If a company has a surplus of cash or non-cash assets (e.g. property) and it does not require that capital for its day-to-day operations, it may choose to cancel some of its issued shares and return the surplus capital to the shareholders.
Support a share buyback or share redemption
When a company wishes to purchase or redeem its own shares (e.g. if a shareholder retires or passes away) but doesn’t have enough distributable reserves to do so, it can carry out a reduction of capital to purchase or redeem those shares and then cancel them.
Facilitate a demerger
By reducing the capital of the original company, different parts of the business can be split from one another.
Distribute non-cash assets to members
If a company has non-cash assets that it wishes to transfer to shareholders, it can cancel or reduce the nominal value of its shares in exchange for those non-cash assets.
Provided that the sum of any capital reduction is not required by the company for its ongoing business operations, it can carry out a reduction of capital for any reason.
How to reduce capital in a company
There are many different ways that a company can reduce its share capital, depending on the overall aim of carrying out such a procedure. These include:
- Reducing the nominal (par) value of each issued share. For example, if a company has 1500 issued shares with a nominal value of £1 each and it wishes to return £750 to the shareholders, it can reduce its share capital by lowering the nominal value of every share from £1 to £0.50.
- Cancelling shares to repay share capital the company no longer requires. For example, if a company has 100 shares with a nominal value of £10 each and it wishes to repay £500 to the shareholders, it can reduce its share capital by cancelling 50 shares.
- Cancelling or reducing any outstanding liability on unpaid or partly paid shares.
- Repaying any paid-up share capital that exceeds the company’s requirements for capital.
- Cancelling paid-up share capital that is lost or not represented by the company’s available assets. This is knowns as a ‘loss reduction’ and it is sometimes used when a company’s assets are worth less than its share capital after a period of unprofitable trading. For example, if a company issued 1000 x £1 shares but its assets are now only worth £750, it can reduce its share capital accordingly by writing off £0.25 from the nominal value of each share.
Companies can use any of these individual strategies – or a combination of them – to facilitate a reduction of capital.
The reduction of capital procedure for private limited companies
The Companies Act 2006 sets out the rules for carrying out a reduction of capital in a UK company. Additional rules and restrictions may also be included in a company’s articles of association and shareholders’ agreement.
In a private company limited by shares, you can reduce capital using one of the following two procedures: a special resolution supported by a solvency statement, or a special resolution confirmed by the court.
In either case, the articles of association must not prohibit a reduction of capital, and the company must have at least one non-redeemable share left in issue after the reduction has taken place.
Special resolution supported by a solvency statement of the directors
This is the most commonly used and straightforward of the two options prescribed by the Companies Act 2006.
To carry out a reduction of capital by special resolution supported by a solvency statement, the directors must complete and sign a solvency statement and propose a special resolution to the company’s shareholders.
A solvency statement is a declaration confirming that, at the date of the statement, every director has formed the following opinions:
- There are no grounds on which the company could be found unable to pay (or otherwise discharge) its debts; and
- The company will be able to pay (or otherwise discharge) its debts as they fall due within the next 12 months; or
- if the company is to be wound up within 12 months of the date of the statement, the company will be able to pay (or otherwise discharge) its debts in full within 12 months of the commencement of its winding up
The directors should provide a copy of the statement to the shareholders when they vote on the proposed resolution, to carry out a reduction of capital.
If the shareholders’ resolution is proposed as a written resolution, the directors must provide a copy of the solvency statement to every eligible shareholder before or at the same time as sending the proposed resolution.
If the resolution is proposed and voted on at a general meeting, a copy of the solvency statement will need to be made available to the shareholders for inspection throughout the meeting.
The shareholders must pass the special resolution no later than 15 days after the date of the solvency statement.
If it passes, the directors should send a copy of the special resolution and solvency statement, along with an up-to-date statement of capital, to Companies House within 15 days.
The statement of capital (form SH19) must include the following information with respect to the company’s share capital after the reduction:
- total number of remaining issued shares
- aggregate nominal value of those shares
- aggregate amount (if any) unpaid on the shares (whether on account of their nominal value or by way of a share premium)
- prescribed particulars of rights attached to each class (type) of shares
- total number of shares of each class
- aggregate nominal value of shares of each class
Companies House will record all of this information and display copies of the filed documents on the public register of companies.
Special resolution with confirmation of the court
The alternative option for private companies limited by shares is to reduce capital by passing a special resolution of the shareholders and applying for confirmation from the court.
In this situation, the company’s creditors have the right to object to the reduction of capital if:
- they can demonstrate that the reduction is likely to result in the company being unable to pay the debts or claims they owe when they fall due; or
- at the date fixed by the court, they are entitled to any debt or claim that, if that date were the commencement of the winding up of the company, would be admissible in proof against the company
To carry out a reduction of capital using this procedure, the directors will need to propose a special resolution for the shareholders, either in writing or at a general meeting, agree on a timetable with the court, and obtain the appropriate court order.
If the court is satisfied with the application and the company’s standing with its creditors, it will make an order to confirm the capital reduction on such terms and conditions as it sees fit.
Once approved, the directors should file a copy of the court order confirming the reduction of capital at Companies House, along with a copy of the resolution, and an up-to-date statement of capital reflecting the share capital after reduction.
Companies House will then record all of this information on the public register of companies.
Reduction of capital procedure for public limited companies (PLCs)
The only reduction of capital procedure available to public limited companies (PLCs) is a special resolution confirmed by the court.
Much of the procedure is the same as that which applies to private limited companies, but there are additional considerations to bear in mind:
- A PLC cannot pass resolutions in writing. The directors would need to call a general meeting of the shareholders to propose and vote on the resolution to reduce the company’s share capital.
- PLCs must have a minimum issued share capital of £50,000 at all times. If the court makes an order to confirm the reduction of capital that would bring the nominal value of issued share capital below this authorised minimum, Companies House will refuse to register the order – unless otherwise instructed by the court, or the PLC first re-registers as a private company.
There may be tax implications for the company and/or shareholders upon a reduction of capital. So, we would advise consulting an accountant or tax advisor prior to carrying out any such procedure.
In certain situations, such as cancelling shares, the reduction may be considered a disposal for Capital Gains Tax. Additionally, shareholders may be liable to Income Tax on any repayment of capital they receive from the company following a reduction.
Need help with a reduction of capital for a private limited company?
If you are considering a reduction of capital for your UK limited company, get in touch with our Company Secretarial Team for help and advice.
1st Formations Reduction of Capital Service (available from £165.00 plus VAT) provides everything you need, including specialist advice and the processing and completion of all required documentation to reduce your company’s share capital.
To find out more about this service, please contact our Company Secretarial Team on 0203 984 5387 or email us at email@example.com.
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