{"id":6770,"date":"2019-09-30T15:59:34","date_gmt":"2019-09-30T14:59:34","guid":{"rendered":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/?p=6770"},"modified":"2024-01-30T10:35:02","modified_gmt":"2024-01-30T10:35:02","slug":"reduction-of-capital-everything-you-need-know","status":"publish","type":"post","link":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/reduction-of-capital-everything-you-need-know\/","title":{"rendered":"Reduction of capital &#8211; everything you need to know"},"content":{"rendered":"<p>There are a number of reasons why a company may wish to carry out a reduction of capital. Below, we\u2019ll take you through the different routes required by both private and public companies. We will also walk you through some of the points that directors need to consider to ensure that all legal requirements are met.<\/p>\n            <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/fully-inclusive-package\/\" class=\"related related-buy\" data-wpel-link=\"internal\"><span class=\"related-title related-buy-title\">Set up a limited company using our Fully Inclusive Package<\/span><\/a>\n        \n<p>Before the introduction of the Companies Act 2006, private companies could only effect a reduction of capital by obtaining a court order. Today, the procedure for reducing capital depends on the legal formation of the company. Private companies no longer need a court order, making things quicker, easier, and less expensive.<\/p>\n            <div class=\"squarespace_shortcode\">\n                <a href=\"https:\/\/squarespace.syuh.net\/c\/2707416\/559024\/9084\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">\n                    <img decoding=\"async\" src=\"https:\/\/s3-eu-west-1.amazonaws.com\/bso.media.cdn\/generic\/affiliates\/squarespace-banner-mobile.jpg\"\n                        alt=\"Everything you need to grow online.\"\n                        class=\"squarespace_shortcode-mobile\">\n                    <img decoding=\"async\" src=\"https:\/\/s3-eu-west-1.amazonaws.com\/bso.media.cdn\/generic\/affiliates\/squarespace-banner-desktop.jpg\"\n                        alt=\"Everything you need to grow online.\"\n                        class=\"squarespace_shortcode-desktop\">\n                <\/a>\n            <\/div>\n        \n<h3>Reasons why a reduction of capital may be required<\/h3>\n<p>There are a number of reasons why a company might want to reduce its share capital:<\/p>\n<ul>\n<li><strong>Reduce liability: <\/strong>the most common reason is to reduce the number of shares to a more manageable level, i.e., to reduce liability.<\/li>\n<li><strong>To eliminate losses: <\/strong>as a company can only pay a dividend from surplus profits, eliminating accumulated losses that would otherwise prevent these payments is sometimes desirable.<\/li>\n<li><strong>To return surplus capital: <\/strong>if a company has a surplus of cash or assets, these may be paid directly to shareholders by canceling the shares issued to them.<\/li>\n<li><strong>To support share buy-back or redemption: <\/strong>if a company wants to buy back or redeem shares out of its distributable profits, it may carry out a reduction of capital in order to create enough distributable profits to do so.<\/li>\n<\/ul>\n                                                    <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/redesignation-a-guide-to-converting-your-company-shares\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">Redesignation &#8211; a guide to converting your company shares<\/span><\/a>\n                    \n<p>Some companies also do this as a way to reorganise or simplify their group structures.<\/p>\n<p>The result of capital reduction is that the number of shares in the company will decrease by the reduction amount. However, the company\u2019s market value won\u2019t change &#8211; there will simply be fewer shares available to trade.<\/p>\n<h3>What are the requirements for a reduction of capital?<\/h3>\n<p>The following conditions will need to be met:<\/p>\n<ul>\n<li>The articles of association should not prohibit the reduction of share capital. If they do, they can be amended by passing a special resolution.<\/li>\n<li>There has to be at least one non-redeemable share in issue after the share capital is reduced (these types of shares can\u2019t be redeemed during the lifetime of the company, and can only be obtained at the time of winding up of assets).<\/li>\n<\/ul>\n<p>You can find the rules for share capital reduction in <a href=\"https:\/\/www.legislation.gov.uk\/ukpga\/2006\/46\/part\/17\/chapter\/10\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">Chapter 10 of Part 17 of the Companies Act 2006<\/a>.<\/p>\n<h3><strong>\u00a0<\/strong>How does a company go about reducing its share capital?<\/h3>\n<p>The reduction of capital is set out in the <a href=\"http:\/\/www.legislation.gov.uk\/ukpga\/2006\/46\/contents\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">Companies Act 2006<\/a> and there are two ways this can be done, depending on the type of company:<\/p>\n<ul>\n<li>By <strong>special resolution with confirmation of the court<\/strong> \u2013 private limited companies may wish to use this route; however, it <em>has<\/em> to be taken by public limited companies.<\/li>\n<li>By <strong>special resolution supported by a solvency statement<\/strong> <strong>of the directors<\/strong> &#8211; this route is for private limited companies only. However, there may be occasions when a private limited company may prefer to obtain a court order.<\/li>\n<\/ul>\n<p>Either route needs a resolution by at least 75% of the eligible members of the company.<\/p>\n<h3>What steps does the reduction of capital procedure include?<\/h3>\n<p>This route is open to private limited companies only and falls under Sections <a href=\"http:\/\/www.legislation.gov.uk\/ukpga\/2006\/46\/section\/642\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">642 and 643 of the Companies Act 2006<\/a>. There are a number of steps:<\/p>\n<ul>\n<li>The passing of a special resolution.<\/li>\n<li>The issuing of a statement of solvency by the directors.<\/li>\n<li>A statement of capital, showing the company\u2019s share capital as reduced.<\/li>\n<li>A statement by the directors confirming the solvency statement wasn\u2019t made more than 15 days before the date the special resolution was passed.<\/li>\n<li>The filing of form SH19(644) with Companies House.<\/li>\n<\/ul>\n<h3>What is a special resolution?<\/h3>\n<p>Under the Companies Act 2006, certain important decisions have to be passed by \u2018special resolution\u2019 \u2013 one of which is the decision to reduce share capital. It\u2019s a way of helping to protect minority shareholders against important decisions being made without due consideration and needs 75% of shareholders to agree to it, in order to pass.<\/p>\n<h3>What information must the solvency statement include?<\/h3>\n<p>The solvency statement must be signed in writing by all directors, confirming that, as of the date of the statement:<\/p>\n<ul>\n<li>There are no grounds on which the company could be found to be unable to pay or discharge its debts, and<\/li>\n<li>In the 12 months following the statement, it will be able to pay or discharge any debts as they fall due. Or, if the company is being wound up, that it will be able to do this, in full, within 12 months of the commencement of the winding-up.<\/li>\n<\/ul>\n                                                    <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/pre-emption-rights-key-to-maintaining-shareholdings\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">Pre-emption rights &#8211; the key to maintaining your shareholdings<\/span><\/a>\n                    \n<p>The solvency statement shouldn\u2019t be made more than 15 days before the date of the passing of the shareholders\u2019 special resolution.<\/p>\n<p>Note, failing to have reasonable grounds for believing the opinions in a solvency statement and still signing it, constitute an offence that could lead to up to two years of imprisonment or a fine.<\/p>\n<h3>What are the things the directors need to know before providing a solvency statement?<\/h3>\n<p>If you\u2019re the director of a private limited company, there are some things you need to be sure about, and do, before signing a solvency statement. These include:<\/p>\n<ul>\n<li>Carefully considering the financial position of your company and the effect of reducing any capital.<\/li>\n<li>Taking account of the company\u2019s liabilities, including any that are likely to arise over the following 12 months.<\/li>\n<\/ul>\n<p>To do this, directors need to fully review the company\u2019s financial status, including future projections. This involves considering the company\u2019s current accounts showing its net assets, projected business plans, cash flow, and net assets for the following 12 months.<\/p>\n<p>Alternatively, if the company is due to be wound up in the next 12 months, it\u2019s necessary to show a plan of how this will be done, along with how any liabilities will be discharged within 12 months of the commencement of winding up.<\/p>\n<h3>Is there any guidance about what steps to take before making a solvency statement?<\/h3>\n<p>The Company Law Committee of the City London Law Society provides some <a href=\"https:\/\/www.icaew.com\/-\/media\/corporate\/files\/technical\/legal-and-regulatory\/modernising-uk-company-law\/private-company-reduction-of-capital-supported-by-solvency-statement-law-and-regulation-icaew.ashx\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">guidance<\/a>, letting directors know what steps they can take before making their statement of solvency, to avoid risking committing an offence under the Companies Act 2006. This includes:<\/p>\n<ul>\n<li>Seeking advice from an independent auditor or accountant. Although this isn\u2019t necessary under the Companies Act 2006, it can ensure the directors fully understand the decision they\u2019re reaching, and whether it\u2019s the right one.<\/li>\n<li>Keeping records of the information they\u2019ve considered, as this demonstrates they\u2019ve exercised reasonable care, skill, and diligence in reaching their decision.<\/li>\n<li>Considering any potential risks to the company\u2019s business model, e.g. potential insolvency of suppliers or loss of customers.<\/li>\n<li>Considering different factors depending on the circumstances: for example, whether the company is trading or non-trading.<\/li>\n<\/ul>\n<p>There are also a number of directors\u2019 duties laid out in the Companies Act, including the duties to promote the success of the business, exercise reasonable care, skill and diligence, and act within their powers.<\/p>\n<h3>How must a solvency statement be made available to the members of a company?<\/h3>\n<ul>\n<li>If the special resolution is proposed as a \u2018written resolution\u2019, a copy of the solvency statement must be given to every eligible member at or before the time the proposed written resolution is submitted; or<\/li>\n<li>If the special resolution is proposed at a general meeting, members must be able to view a copy of the solvency statement throughout the meeting.<\/li>\n<\/ul>\n<h3>Why might a private limited company seek a special resolution via the court?<\/h3>\n<p>Even though it\u2019s only public limited companies that have to gain a special resolution in court, there may be times when this method is preferable for a private limited company. For example, if not all the directors are willing to sign the solvency statement or if they simply wish to be guided by the court, especially if there are creditors who may oppose the reduction.<\/p>\n                                                    <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/why-do-companies-use-multiple-share-classes\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">Why do companies use multiple share classes?<\/span><\/a>\n                    \n<p>As one might imagine, though, the solvency statement procedure is easier and less costly than going via the court-approved route.<\/p>\n<h3>What is the court procedure for approving a reduction in shares?<\/h3>\n<p>After a company has gained shareholder approval to reduce its capital, the next step is to apply to the court for a confirmation order &#8211; the court can grant this on any terms and conditions it sees fit. Generally, the court will agree to a reduction of capital so long as it\u2019s satisfied that:<\/p>\n<ul>\n<li>The company\u2019s creditors have consented to it &#8211; or there are measures in place to protect the creditors.<\/li>\n<li>Shareholders have been treated fairly and have had the reasons for the share reduction properly explained to them. This is usually done by a circular, and the court will want to see evidence of this.<\/li>\n<li>The company has complied with all procedural requirements.<\/li>\n<\/ul>\n<h3>Does a reduction of share capital need to be reported to Companies House?<\/h3>\n<p>Within 15 days of passing the resolution, <a href=\"https:\/\/assets.publishing.service.gov.uk\/government\/uploads\/system\/uploads\/attachment_data\/file\/533449\/SH19_Section_644_v5_2_.pdf\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">Form SH19<\/a> needs to be filed with Companies House, along with:<\/p>\n<ul>\n<li>a copy of the shareholders\u2019 special resolution<\/li>\n<li>a directors\u2019 statement of solvency<\/li>\n<li>a directors\u2019 compliance statement, stating that the solvency statement wasn\u2019t made more than 15 days before the date of the special resolution and was given to the members before the resolution was passed.<\/li>\n<\/ul>\n                                                    <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/closing-a-company-a-guide-to-voluntary-dissolution-and-strike-off\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">Closing a company \u2013 a guide to voluntary dissolution and strike off<\/span><\/a>\n                    \n<p>The SH19 form is effective when it is processed by Companies House, i.e. the reduction of capital does not take place until this happens.<\/p>\n<h3>Are there alternatives to reducing share capital?<\/h3>\n<p>There are various ways a company can achieve a similar effect to reducing share capital without having to do exactly that. These include:<\/p>\n<ul>\n<li>Purchasing its own shares (<a href=\"http:\/\/www.legislation.gov.uk\/ukpga\/2006\/46\/section\/690\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">Companies Act, Section 690<\/a>).<\/li>\n<li>Redeeming preference shares (<a href=\"http:\/\/www.legislation.gov.uk\/ukpga\/2006\/46\/section\/687\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">Companies Act, Section 687<\/a>).<\/li>\n<li>Adopting a solvent scheme of the arrangement, allowing shares to be transferred rather than canceled and reissued.<\/li>\n<\/ul>\n<h3>How we can help you reduce your share capital<\/h3>\n<p>If you are thinking about reducing your share capital, our Company Secretarial Team can help you every step of the way. Our Reduction of Capital Service (from \u00a3165.00 plus VAT) provides you with expert advice, together with the processing and completion of all documentation you need to reduce your share capital.<\/p>\n<p>If you would like to know more about this service, please get in touch with our CoSec Team today on 0203 984 5389, or email us at <a href=\"mailto:cosec@qualityformations.co.uk\">cosec@qualityformations.co.uk<\/a>.<\/p>\n"},"excerpt":{"rendered":"<p>There are a number of reasons why a company may wish to carry out a reduction of capital. Below, we\u2019ll take you through the different routes required by both private and public companies. We will also walk you through some of the points that directors need to consider to ensure that all legal requirements are&hellip;<\/p>\n","protected":false},"author":10,"featured_media":6771,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false},"categories":[141],"tags":[],"class_list":["post-6770","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-shares-shareholders","category-141","description-off"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.5 (Yoast SEO v23.5) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Reduction of capital - everything you need to know<\/title>\n<meta name=\"description\" content=\"Find out everything you need to know about reduction of capital. 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We guide you through the ways of achieving this for both private and public companies.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/reduction-of-capital-everything-you-need-know\/\" \/>\n<meta property=\"og:site_name\" content=\"Quality Formations Blog\" \/>\n<meta property=\"article:published_time\" content=\"2019-09-30T14:59:34+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2024-01-30T10:35:02+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.qualityformationsblog.co.uk\/wp-content\/uploads\/2019\/09\/SH19.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1500\" \/>\n\t<meta property=\"og:image:height\" content=\"750\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Nicholas Campion\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Nicholas Campion\" \/>\n\t<meta name=\"twitter:label2\" content=\"Estimated reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"8 minutes\" \/>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"Reduction of capital - everything you need to know","description":"Find out everything you need to know about reduction of capital. 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Nick is also Company Secretary for the BSQ Group and all subsidiary brands, an accredited industry leader and a Companies Act 2006 specialist.","jobTitle":"Director, Company Secretarial","url":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/author\/ncampion\/"}]}},"views":33158,"x_categories":"Shares and Shareholders","x_tags":"","x_featured_media":"https:\/\/www.qualityformationsblog.co.uk\/wp-content\/uploads\/2019\/09\/SH19-128x128.jpg","x_featured_media_medium":"https:\/\/www.qualityformationsblog.co.uk\/wp-content\/uploads\/2019\/09\/SH19-600x300.jpg","x_featured_media_large":"https:\/\/www.qualityformationsblog.co.uk\/wp-content\/uploads\/2019\/09\/SH19-600x300.jpg","x_featured_media_original":"https:\/\/www.qualityformationsblog.co.uk\/wp-content\/uploads\/2019\/09\/SH19.jpg","x_date":"30 Sep 2019","x_author":"Nicholas Campion","x_gravatar":"https:\/\/secure.gravatar.com\/avatar\/f9d97f3c5155446fa41f953ae5f16729?s=96&d=mm&r=g","x_metadata":{"_oembed_cc4d86aff942e1c13501546b459ac1ec":"<blockquote class=\"wp-embedded-content\" data-secret=\"EW1cE6DQfh\"><a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/redesignation-a-guide-to-converting-your-company-shares\/\">Redesignation: A guide to converting your company shares<\/a><\/blockquote><iframe title=\"&#8220;Redesignation: A guide to converting your company shares&#8221; 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