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Law for Business

Knowhow - guidance - precedents

06 SEP 2012

Reduction of Share Capital

From March 2012 update of Jordans Company Administration and Governance: IN FOCUS

On 1 October 2009, the manner in which a private company can reduce its share capital was radically changed. By the Companies Act 2006, s 641 a private limited company having a share capital may reduce its share capital simply by means of a special resolution supported by a solvency statement. No longer is the consent of the court needed. It continues to be the case with a public company that the special resolution must be confirmed by the court.

Perhaps because of the need for court consent, coupled with the ability of a company to purchase its own shares since 1982, the provisions for the reduction of capital of the 1985 Act were very infrequently used. However, there appears to be evidence that the revised provisions for reduction are beginning to be used rather more nowadays.

As before, the reduction can be for any reason and, in particular, it may extinguish or reduce the liability on any of its shares in respect of share capital that is not paid up, cancel any paid-up share capital that is no longer represented by available assets and repay any paid-up share capital that is in excess of the company's wants.

Consider a private property company having a share capital of £100m, which, at one time, owned property worth £100m. Some of the property has been sold at a loss of £20m, with a resulting loss showing on the balance sheet. Before the company can pay a dividend, this loss must be cleared. One way would be to reduce the share capital by £20m. Were the company to be wound up, the members would not get back their original capital, but the company is perfectly solvent and the solvency statement can be made by the directors. By s 643, each of the directors must state that he has formed the opinion that there is no ground on which the company could be found to be unable to pay or otherwise discharge its debts and that were the company to go into liquidation within the next year all of its debts would be paid in full within 12 months of the commencement of the liquidation.

The cancellation of the shares no longer represented by available assets is no more than a paper transaction. Its members' shares still have the same aggregate value after the reduction and their percentage stakes within the company remain unchanged.

Previously, a company could only reduce its share capital if authorised to do so by the articles. This requirement has now disappeared. However, a company may by its articles prohibit a reduction of capital. It is not thought that ordinary commercial organisations will do this, but clearly chartable companies and community interest companies will need to do so.


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