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Reduction of capital

When a reduction of capital takes place

Q1:What is a reduction of capital?

A reduction of capital will occur where your A private company limited by shares incorporated and registered in England and Wales. reduces its The total nominal value of a company's shares. References to a company’s share capital can be read as references to all of that company’s shares. or reduces or cancels its A share in the capital of a company (sometimes also referred to as stock, for example in relation to US companies). Shares in a company give to the holders, known as shareholders, rights in relation to that company such as to vote, to receive dividends and to a return of capital. Holders of shares in a company own that company and the company, not its shareholders, owns the company's assets. premium account, capital The redemption by a company of redeemable shares whereby the company makes a payment to the redeemable shareholder in return for cancelling the shares. reserve or redenomination reserve. Each of these reserves are technical reserves in your A private company limited by shares incorporated and registered in England and Wales. 's An accounting document that states the assets and liabilities of a company, or of a group of companies, as at a particular date (also known as a statement of financial position). and arise when your A private company limited by shares incorporated and registered in England and Wales. issues Shares in the capital of a company (sometimes also referred to as stock, for example in relation to US companies). Shares in a company give to the holders, known as shareholders, rights in relation to that company such as to vote, to receive dividends and to a return of capital. Holders of shares in a company own that company and the company, not its shareholders, owns the company's assets. (The total nominal value of a company's shares. References to a company’s share capital can be read as references to all of that company’s shares. and A share in the capital of a company (sometimes also referred to as stock, for example in relation to US companies). Shares in a company give to the holders, known as shareholders, rights in relation to that company such as to vote, to receive dividends and to a return of capital. Holders of shares in a company own that company and the company, not its shareholders, owns the company's assets. premium account) or makes certain changes to its The total nominal value of a company's shares. References to a company’s share capital can be read as references to all of that company’s shares. (capital The redemption by a company of redeemable shares whereby the company makes a payment to the redeemable shareholder in return for cancelling the shares. reserve and redenomination reserve).

Your A private company limited by shares incorporated and registered in England and Wales. will be permitted to reduce one or more of those capital reserves subject to compliance with various strict legal rules. Those rules are quite technical and it is likely that you will need to take specific legal, tax and accounting advice if your A private company limited by shares incorporated and registered in England and Wales. wishes to reduce or cancel one of its capital reserves.

When a reduction of capital may be needed

Q2:When might my company wish to undertake a reduction of its capital reserves?

Your A private company limited by shares incorporated and registered in England and Wales. may wish to undertake a reduction of capital for a wide variety of commercial purposes.

The most common reason for Private companies limited by shares incorporated and registered in England and Wales. reducing their capital is to create The profits of a company out of which the company can pay a dividend or other distribution to its shareholders in order to facilitate the payment of Payments in cash by a company to its shareholders by way of distributions of a share of the company's profits.. This is because there are strict rules governing the circumstances in which your A private company limited by shares incorporated and registered in England and Wales. can pay Payments in cash by a company to its shareholders by way of distributions of a share of the company's profits. to its In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company.. In short, your A private company limited by shares incorporated and registered in England and Wales. will only be able to pay Payments in cash by a company to its shareholders by way of distributions of a share of the company's profits. when it has positive The profits of a company out of which the company can pay a dividend or other distribution to its shareholders (see Dividends and other distributions for detailed guidance on Payments in cash by a company to its shareholders by way of distributions of a share of the company's profits.). If your A private company limited by shares incorporated and registered in England and Wales. has historically made losses but has started to make profits, a reduction of capital may be a useful way of bringing forward the time when your A private company limited by shares incorporated and registered in England and Wales. can start paying Payments in cash by a company to its shareholders by way of distributions of a share of the company's profits. to its In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company..

Other common reasons for which your A private company limited by shares incorporated and registered in England and Wales. may wish to undertake a reduction of capital will include:

to create reserves so as to allow your A private company limited by shares incorporated and registered in England and Wales. to buy back some of its Shares in the capital of a company (sometimes also referred to as stock, for example in relation to US companies). Shares in a company give to the holders, known as shareholders, rights in relation to that company such as to vote, to receive dividends and to a return of capital. Holders of shares in a company own that company and the company, not its shareholders, owns the company's assets. from its In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company. (see Buying back shares from existing shareholders for an introduction to This is where a company buys its own shares from its shareholders. A share buyback is prohibited unless a specific legal exception applies. If an exception does apply a prescribed set of rules must be followed otherwise the buyback is invalid.);
to improve your position if there has been an unlawful buyback of Shares in the capital of a company (sometimes also referred to as stock, for example in relation to US companies). Shares in a company give to the holders, known as shareholders, rights in relation to that company such as to vote, to receive dividends and to a return of capital. Holders of shares in a company own that company and the company, not its shareholders, owns the company's assets. by your A private company limited by shares incorporated and registered in England and Wales. (see Buying back shares from existing shareholders). This often occurs when a A private company limited by shares incorporated and registered in England and Wales. has sought to buy Shares in the capital of a company (sometimes also referred to as stock, for example in relation to US companies). Shares in a company give to the holders, known as shareholders, rights in relation to that company such as to vote, to receive dividends and to a return of capital. Holders of shares in a company own that company and the company, not its shareholders, owns the company's assets. from its In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company. without realising that such a transaction must follow a specific set of legal rules, or where it has not followed those rules properly. A reduction of capital may help your A private company limited by shares incorporated and registered in England and Wales. to partly mitigate any problems arising from not following properly the legal rules; and
to reduce the The fixed monetary value of a share. Every share in a limited company with share capital must have a fixed nominal value. of your A private company limited by shares incorporated and registered in England and Wales. 's Shares in the capital of a company (sometimes also referred to as stock, for example in relation to US companies). Shares in a company give to the holders, known as shareholders, rights in relation to that company such as to vote, to receive dividends and to a return of capital. Holders of shares in a company own that company and the company, not its shareholders, owns the company's assets. so as to enable your A private company limited by shares incorporated and registered in England and Wales. to issue new Shares in the capital of a company (sometimes also referred to as stock, for example in relation to US companies). Shares in a company give to the holders, known as shareholders, rights in relation to that company such as to vote, to receive dividends and to a return of capital. Holders of shares in a company own that company and the company, not its shareholders, owns the company's assets. . This may be necessary if your A private company limited by shares incorporated and registered in England and Wales. has suffered losses or for some other reason is required to issue Shares in the capital of a company (sometimes also referred to as stock, for example in relation to US companies). Shares in a company give to the holders, known as shareholders, rights in relation to that company such as to vote, to receive dividends and to a return of capital. Holders of shares in a company own that company and the company, not its shareholders, owns the company's assets. at a price lower than the current The fixed monetary value of a share. Every share in a limited company with share capital must have a fixed nominal value. of its Shares in the capital of a company (sometimes also referred to as stock, for example in relation to US companies). Shares in a company give to the holders, known as shareholders, rights in relation to that company such as to vote, to receive dividends and to a return of capital. Holders of shares in a company own that company and the company, not its shareholders, owns the company's assets. .

How to do a reduction of share capital

Q3:How can my company reduce its share capital?

If your A private company limited by shares incorporated and registered in England and Wales. is a A company which is not a public limited company and whose constitution states that the liability of its shareholders is limited to the amount, if any, unpaid on their shares. The vast majority of SMEs will be private companies and not public companies. There are a number of differences between private and public companies, including the ability of a public company, but not a private company, to offer its shares to the public and the requirement for a public company, but not a private company, to have a minimum amount of share capital., it has a choice of how to undertake a reduction of its capital reserves.

The first approach is to reduce capital by means of a procedure involving the confirmation of the A court for claims between individuals or companies. It can hear high-value claims for the first time, or appeals against most claims that have already been heard in the County Court.. See Q&A 6.
Alternatively, your A private company limited by shares incorporated and registered in England and Wales. may elect to reduce its capital reserves by means of a process known as the solvency statement or self-help procedure. The self-help process does not require the approval of the Court but instead involves the The directors of a company are the individuals who make up the company's board of directors. Directors may be natural persons or companies, but each company must have at least one director who is a natural person. The board is the main decision-making body of the company. of your A private company limited by shares incorporated and registered in England and Wales. making a solvency statement. See Q&A 7.

If your A private company limited by shares incorporated and registered in England and Wales. is a A company limited by shares whose certificate of incorporation states that it is a public company, in relation to which the statutory registration requirements have been complied with and whose constitution states that its members' liability will be limited to the amount, if any, unpaid on their shares. The vast majority of SMEs will be private companies and not public companies. There are a number of differences between public and private companies, principally the ability of a public company, but not a private company, to offer its shares to the public and the requirement for a public company to have a minimum amount of share capital., it must follow the Court procedure in order to reduce its The total nominal value of a company's shares. References to a company’s share capital can be read as references to all of that company’s shares. . The self-help remedy is only available to Companies which are not public limited companies and whose constitutions state that the liability of their shareholders is limited to the amount, if any, unpaid on their shares. The vast majority of SMEs will be private companies and not public companies. There are a number of differences between private and public companies, including the ability of a public company, but not a private company, to offer its shares to the public and the requirement for a public company, but not a private company, to have a minimum amount of share capital..

Q4:Does my company need a specific power in its articles of association to reduce its capital?

No. Your A private company limited by shares incorporated and registered in England and Wales. will be deemed to have the power to reduce its capital unless its constitution provides otherwise. If your A private company limited by shares incorporated and registered in England and Wales. has adopted the The standard, default articles of association that a company can use. Articles set the rules that company officers must follow when running the company., it will have the necessary power. If your A private company limited by shares incorporated and registered in England and Wales. has not adopted the The standard, default articles of association that a company can use. Articles set the rules that company officers must follow when running the company. (or has modified them), you will need to check your The rules controlling how a company is run. A company's main constitutional document is its articles of association. References to a company's constitution will also include the memorandum of association, any shareholders' agreement that company might have and any resolutions that bind the shareholders (such as special resolutions). to make sure that it has not restricted the power to reduce capital. If your A private company limited by shares incorporated and registered in England and Wales. does have a constitutional restriction on A promise to do or not do something, commonly contained in a contract. a capital reduction, it might need to change its Also referred to as articles of association, a company’s articles are the main body of rules which govern how the company regulates its internal affairs (subject to certain overriding legal requirements). Important matters addressed in the articles include the division of powers between directors and shareholders, the composition and operation of the board of directors, matters relating to the holding and conduct of directors’ and shareholders’ meetings, and provisions relating to the transfer of shares. of association by way of a A decision made by shareholders of a company, which requires the approval of shareholder(s) holding 75% or more of the company's voting shares. of the In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company. (see Changing a company's articles of association for how to change your Also referred to as articles of association, a company’s articles are the main body of rules which govern how the company regulates its internal affairs (subject to certain overriding legal requirements). Important matters addressed in the articles include the division of powers between directors and shareholders, the composition and operation of the board of directors, matters relating to the holding and conduct of directors’ and shareholders’ meetings, and provisions relating to the transfer of shares.).

Q5:Does my company need the approval of its shareholders in order to undertake a reduction of capital?

Yes. A reduction of capital is one of the transactions the law requires a A private company limited by shares incorporated and registered in England and Wales. 's In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company. to approve. A reduction of capital must be approved by the In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company. of your A private company limited by shares incorporated and registered in England and Wales. by a A decision made by shareholders of a company, which requires the approval of shareholder(s) holding 75% or more of the company's voting shares. (meaning at least 75% of the In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company. who vote in relation to the proposal). The A formal decision made by the directors or members of a company, which binds the company once it is passed. can be passed at a meeting or, if your A private company limited by shares incorporated and registered in England and Wales. is a A company which is not a public limited company and whose constitution states that the liability of its shareholders is limited to the amount, if any, unpaid on their shares. The vast majority of SMEs will be private companies and not public companies. There are a number of differences between private and public companies, including the ability of a public company, but not a private company, to offer its shares to the public and the requirement for a public company, but not a private company, to have a minimum amount of share capital., by a A procedure allowing private companies to pass a members' resolution without having to hold a general meeting. Copies of the resolution are circulated to each member in hard copy or electronic form, for the members to consider and return their agreement to the resolution if they so decide. (see How to make a shareholders' decision for guidance on proposing and passing a A decision made by shareholders of a company, which requires the approval of shareholder(s) holding 75% or more of the company's voting shares.).

Court approved reduction of capital

Q6:In summary, how does the Court process work?

If your A private company limited by shares incorporated and registered in England and Wales. wishes to undertake a Court approved reduction of capital, it will need to instruct a firm of solicitors to assist (and possibly also a barrister). In short, the process will take between four and six weeks to complete once your A private company limited by shares incorporated and registered in England and Wales. 's In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company. have approved the transaction. Overall costs are likely to run to at least £10,000 (plus Value Added Tax. A type of tax which is charged when goods or services are supplied to a person in the UK.) and potentially significantly more if the capital reduction is other than straightforward.

The key issue for the Court will be to make sure that the proposed reduction of capital does not adversely impact any of your A private company limited by shares incorporated and registered in England and Wales. 's People or businesses to whom money is owed. and it is likely that you will have to produce evidence of the financial position of your A private company limited by shares incorporated and registered in England and Wales. and its People or businesses to whom money is owed. for submission to the Court. The reduction of capital reserve will take effect once The registrar of all companies in the UK. Companies House incorporates and dissolves limited companies, registers the information companies are legally required to supply, and makes that information available to the public. has registered the order of the Court approving the reduction.

Reduction of capital using the solvency statement

Q7:In summary, what steps will my company have to take in order to reduce its share capital using the solvency statement (non-Court) process?

In summary, the procedural requirements are as follows:

the In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company. of your A private company limited by shares incorporated and registered in England and Wales. will need to pass a A decision made by shareholders of a company, which requires the approval of shareholder(s) holding 75% or more of the company's voting shares. approving the reduction of capital reserve;
the A decision made by shareholders of a company, which requires the approval of shareholder(s) holding 75% or more of the company's voting shares. must be supported by a solvency statement made by all of the The directors of a company are the individuals who make up the company's board of directors. Directors may be natural persons or companies, but each company must have at least one director who is a natural person. The board is the main decision-making body of the company. of your A private company limited by shares incorporated and registered in England and Wales. stating that they:
1. have formed the opinion, as regards your A private company limited by shares incorporated and registered in England and Wales. 's situation at the date of the statement, that there is no ground on which your A private company limited by shares incorporated and registered in England and Wales. could then be found to be unable to pay (or otherwise discharge) its debts;
2. have also formed the opinion:
  1. if it is intended to commence the The process whereby a company is closed. Its assets are sold to pay off creditors and other expenses. Anything remaining is distributed to the shareholders of the company. of your A private company limited by shares incorporated and registered in England and Wales. within a 12-month period from the capital reduction, that your A private company limited by shares incorporated and registered in England and Wales. can pay (or otherwise discharge) its debts in full within 12 months of the commencement of the The process whereby a company is closed. Its assets are sold to pay off creditors and other expenses. Anything remaining is distributed to the shareholders of the company.; or
  2. in any other case, that your A private company limited by shares incorporated and registered in England and Wales. will be able to pay (or otherwise discharge) its debts as they fall due during the year immediately following that date;
the solvency statement must be signed by all of the The directors of a company are the individuals who make up the company's board of directors. Directors may be natural persons or companies, but each company must have at least one director who is a natural person. The board is the main decision-making body of the company. of your A private company limited by shares incorporated and registered in England and Wales. not more than 15 days before the date on which the A formal decision made by the directors or members of a company, which binds the company once it is passed. is passed;
where your A private company limited by shares incorporated and registered in England and Wales. opts to use the A procedure allowing private companies to pass a members' resolution without having to hold a general meeting. Copies of the resolution are circulated to each member in hard copy or electronic form, for the members to consider and return their agreement to the resolution if they so decide. procedure (instead of holding a physical A meeting of the company's shareholders or members.), a copy of the solvency statement must be sent to all members entitled to vote at or before the time at which the A formal decision made by the directors or members of a company, which binds the company once it is passed. is sent to them;
where the A formal decision made by the directors or members of a company, which binds the company once it is passed. is passed at a physical meeting, the solvency statement must be available for inspection by the In relation to a company limited by shares, means persons whose names have been entered in the register of members of that company as shareholders in that company. of your A private company limited by shares incorporated and registered in England and Wales. throughout the meeting;
the solvency statement must be in a prescribed form, must identify the name of each The directors of a company are the individuals who make up the company's board of directors. Directors may be natural persons or companies, but each company must have at least one director who is a natural person. The board is the main decision-making body of the company. of your A private company limited by shares incorporated and registered in England and Wales. and the date it is made;
within 15 days of the A formal decision made by the directors or members of a company, which binds the company once it is passed. , a copy of the statement, a statement of capital and a copy of the A formal decision made by the directors or members of a company, which binds the company once it is passed. must be delivered to The registrar of all companies in the UK. Companies House incorporates and dissolves limited companies, registers the information companies are legally required to supply, and makes that information available to the public.; and
the The directors of a company are the individuals who make up the company's board of directors. Directors may be natural persons or companies, but each company must have at least one director who is a natural person. The board is the main decision-making body of the company. are also required to deliver to The registrar of all companies in the UK. Companies House incorporates and dissolves limited companies, registers the information companies are legally required to supply, and makes that information available to the public. within 15 days of passing the A formal decision made by the directors or members of a company, which binds the company once it is passed. , a statement confirming that the solvency statement was made not more than 15 days before the A formal decision made by the directors or members of a company, which binds the company once it is passed. was passed and provided to members as set out above.

The reduction of capital reserve will only take effect once the documents referred to above have been delivered to and registered by The registrar of all companies in the UK. Companies House incorporates and dissolves limited companies, registers the information companies are legally required to supply, and makes that information available to the public..