A share capital reduction is an allowed way for limited companies to reduce their share capital without the need to meet the requirements for a redemption or purchase of own shares out of capital. There are a number of ways that the reduction of share capital can be achieved.
Whilst public limited companies can carry out a share capital reduction they have to obtain a court order. Private limited companies do not need to do so and can, instead of obtaining a court order, complete a reduction of share capital supported by a solvency statement.
However a reduction of share capital is to be achieved there are a number of legal requirements that companies need to complete. Then once it has been completed the reduction of share capital must be reported to Companies House using form SH19 together with copies of the shareholders resolution and directors’ compliance statement.
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Why carry out a share capital reduction?
There are a number of reasons why a company may want to carry out a reduction of share capital, including:
- returning to shareholders the capital not needed for the company’s ongoing operations.
- cancelling capital that is no longer supported by the assets of the company, this is where the share capital is more than the net assets of the company.
- extinguishing or reducing the liability of shareholders on shares that are not fully paid where the unpaid capital is not expected to be needed by the company.
A reduction of share capital can, therefore, be used where a shareholder wants to retire from a company provided that the amount being paid to the retiring shareholder is not needed for the company’s ongoing operations.
Before deciding on making a share capital reduction you should obtain suitable legal and taxation advice.
How a reduction of share capital can be structured
A share capital reduction can be achieved by a variety of methods:
- cancelling share capital no longer supported by the company’s assets;
- repaying share capital no longer required and then cancelling the shares;
- reducing the nominal value of a share class where the capital is no longer supported by the company’s assets;
- waiving the amounts due on unpaid shares where the amounts are no longer expected to be required by the company; or
- a combination of the above.
Requirements for a share capital reduction
The rules for share capital reductions are set out in Chapter 10 of Part 17 of the Companies Act 2006.
To complete a share capital reduction, the directors need to ensure that the following are met:
- The articles of association do not prohibit share capital reductions – these can be amended by passing a special resolution ;
- There will be at least one non-redeemable share in issue after the reduction of share capital.
If the company is a private limited company then the share capital reduction can be completed by the passing of a special resolution supported by a solvency statement given by the directors.
If the company is a PLC then the share capital reduction must be done by passing a special resolution confirmed by the court. A private limited company may also have the reduction confirmed by the court rather than supported by a solvency statement.
In either case the following needs to be completed:
- Board approval to propose the share capital reduction
- Passing of a special resolution approving the share capital reduction
Where the reduction needs to be confirmed by the court the directors then need to obtain the necessary court order.
Where the reduction is to be supported by a solvency statement the directors need to provide the solvency statement in accordance with sections 642 to 643 of the Companies Act 2006.
The remainder of this article mainly concerns private companies carrying out share capital reductions supported by a solvency statement.
Directors’ solvency statement
The directors’ solvency statement should state:
- if they intend to commence the winding up of the company within twelve months of the date of the solvency statement, that the company will be able to pay its debts in full within twelve months of the commencement of the winding-up; or
- in any other case, that the company will be able to pay or otherwise discharge its debts as they fall due during the year immediately following the date of the solvency statement.
In making the solvency statement the directors will need to have made a full review of the company’s financial status, current operations and future projections.
For this they should have prepared and considered:
Directors' solvency statement
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- the current accounts showing the company’s net assets; and
- if it is planned to wind the company up in the next twelve months:
- a plan of how the company is to be wound up; and
- a plan of how the company will pay or otherwise discharge its liabilities within twelve months of the commencement of the winding up;
- if it is planned for the company to continue:
- business plans for the next 12 months;
- a projected cashflow, including capital expenditure, for the next 12 months; and
- projected net assets for the following year.
Once the directors have made the solvency statement the shareholders’ special resolution must then be passed within the next 15 days.
The shareholders must have the directors’ solvency statement available for inspection at the meeting called to approve the share capital reduction. If the resolution is not being approved at a meeting of the shareholders the directors’ statement of solvency will need to be sent with the notice of the written special resolution.
Inform Direct produces tailored board and shareholders resolutions for a reduction of share capital as well as the directors’ solvency and compliance statements and form SH19.
What happens if the company is wound up within one year?
If the company is wound up within one year of a payment for shares out of capital and the assets are insufficient to meet the company’s liabilities, the directors that made the solvency statement will, unless there where reasonable grounds for making the solvency statement, be guilty of an offence and if found guilty may be:
- imprisoned for a term not exceeding, if convicted on indictment, two years or, on summary conviction, twelve months in England and Wales or six months in Scotland or Northern Ireland; and/or
The liability of the shareholders is the same as normal so that generally they will just have to pay any amounts unpaid on the shares.
Reporting the share capital reduction
The company must within 15 days of the passing of the resolution file the following at Companies House:
- Form SH19, which sets out the statement of capital after the share capital reduction has been completed;
- A copy of the shareholders’ special resolution;
- The directors’ statement of solvency; and
- A directors’ compliance statement, in accordance with section 644(5) of the Companies Act 2006, that the necessary solvency statement was made not more than 15 days before the date of the special resolution and was provided to the members before the passing of the resolution.
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In addition to completing the above forms the company should:
- Update the register of shareholders/members and other similar records for any shares cancelled or any reduction in the nominal value of shares;
- Update the accounting records for any shares cancelled, capital repaid or unpaid capital waived;
- Cancel share certificates where shares are cancelled, the nominal value reduced or unpaid amounts waived;
- Issue new share certificates as applicable.
Taxation of share capital reductions
The taxation of share capital reductions is a complex area and before proceeding with such a capital reduction the directors and shareholders should obtain suitable taxation advice.
In summary it is unlikely that the capital reduction will give rise to taxable income but there may be a disposal for capital gains purposes. Where the reduction is achieved by a reduction in the nominal value or unpaid amounts this is not a disposal of an asset so has no tax implication. However, where shares are cancelled then there may be actual or deemed proceeds, even where no consideration is paid, of the market value of the shares which will be subject to capital gains taxation.