Share Capital Reductions

One of the changes introduced by the Companies Act 2006 which a number of our clients have found useful has been the simplification of the procedure which has to be followed in order to reduce a company`s share capital. Prior to enactment of the 2006 legislation the only way in which a company could reduce its share capital was to follow the expensive and time consuming procedure of making an application to the Companies Court. 

The new procedure means that a reduction of share capital can (for a private company) be effected by way of passing a special resolution which is supported by a "Solvency Statement" given by all of the directors of the company. 

The Solvency Statement is a written statement signed by each director in which, in summary, they confirm that the company is solvent and they are of the belief that it will continue to be so for a period of 12 months following the date upon which they make the statement. It is worth remembering that if a director gives such a Solvency Statement without having reasonable grounds for expressing the opinions within it then potentially the directors doing this could be committing a criminal offence. The directors therefore need to ensure that they have sufficient information relating to the company's affairs to enable them to give a Solvency Statement. 

The main reason we have encountered for clients wishing to reduce their share capital has been that generally speaking if a private company reduces its share capital using the new procedure then the reserve created by such reduction can be treated as realised profit, and so is distributable to the shareholders. 

There are a number of other formalities that need to be complied with and if you have any queries in relation to the new share capital reduction procedure, please do not hesitate to contact a member of the Rollits` Corporate Team.

Posted on: 22/09/2010

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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