Increasing occurrence of reductions of share capital
It's not unusual for a company to have an excess of share capital beyond its actual requirements.
It can be important to show a strong balance sheet including a reasonably high level of capital in a company.In the case of an individual trading company, that could well be the case.
However, it's quite common in groups of companies that subsidiary companies will have a high level of share capital.This can happen, for example, where a company that was originally an independent trading company is now a subsidiary as the result of an acquisition.
In a recent transaction for clients we moved a dormant intermediate holding company down in a group structure so that it became just one of a number of subsidiaries directly held by the group parent.As a result of its previous history, the dormant company had a share capital of £200,000, represented by 200,000 ordinary shares of £1 each.
As part of the group reorganisation we used the 'Solvency Statement' procedure to cancel all but one of the issued shares, leaving a new share capital of just £1.
The 'Solvency Statement' procedure was introduced from 1 October 2008 and is designed to make reductions of capital easier to achieve and is now being used much more often than hitherto. Maintenance of share capital has always been an important principle of English company law and prior to 2008 a reduction of share capital could only be achieved with an appropriate court order - a complicated and expensive process.
Whilst it is still important to maintain the financial strength of companies to protect their creditors, the new legislation recognised that there are circumstances where a reduction of capital is appropriate and should be easier to achieve as long as safeguards are in place
A court order is no longer required, although in certain circumstances (such as where there are potential issues with creditors) it might still be the more appropriate route.
The new procedure requires a special resolution of shareholders supported by a solvency statement given by all the directors.
In the Solvency Statement the directors must confirm they are of the opinion that:
- at the date of the statement, there are no grounds on which the company could be found to be unable to pay its debts; and
- the company will be able to pay or discharge its debts as they fall due for the next 12 months or, if the company is to be wound up in the next 12 months, in full within 12 months of commencing the winding up.
Together with a company's accountants we can advise on the matters the directors need to consider in order to be able to make the Solvency Statement.
The effect of such a reduction of capital is to create a reserve on the balance sheet of the company which is treated as a realised profit and is therefore distributable immediately.
Accordingly, such a reduction of capital will often be shortly followed by the payment of a dividend out of the reserve created (to the extent not needed to eliminate any existing losses).
Alternatively the reduction of capital can be treated as a direct repayment of capital in excess of the wants of the Company, without the creation of a reserve.
If you would like to know more about any aspect of the reduction of share capital please contact any member of the Corporate team at Lupton Fawcett in Leeds, York or Sheffield.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.