Why do capital reduction

More information. What is the Capital Reduction? The Capital Reduction is a commercial operation, which consists of the reduction or decrease of the capital figure that appears in the company's bylaws. The capital reduction would be the opposite of the capital increase, and can be constituted for different purposes or economic reasons. As the lawyers specialized in company law explain , by means of the Capital Reduction there will be a modification of the Company's Bylaws to decrease the company's funds.

To carry it out, you must have the prior agreement of the General Meeting. The capital reduction is important that it be done at the optimal time so that the shareholders, or partners with participations, do not suffer their own capital.

What modalities of Capital Reduction are there? There are three types of Capital Reduction: a Due to a decrease in the real value of the shares or participations, maintaining their number. Through this modality, the company reduces the capital with the total sum of the nominal value of these will be equal to the reduced capital figure. Through this method, the necessary number is eliminated until the new reduced capital figure is reached, with the corresponding reimbursement of contributions to the partner or shareholder.

What does the capital reduction in the company entail? As the lawyers specialized in commercial law comment, one of the effects of the capital reduction is the modification of the Company's Bylaws. 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.

As one might imagine, though, the solvency statement procedure is easier and less costly than going via the court-approved route. After a company has gained shareholder approval to reduce its capital, the next step is to apply to the court for a confirmation order — the court can grant this on any terms and conditions it sees fit.

Within 15 days of passing the resolution, Form SH19 needs to be filed with Companies House, along with:. The SH19 form is effective when it is processed by Companies House, i. There are various ways a company can achieve a similar effect to reducing share capital without having to do exactly that. If you are thinking about reducing your share capital, our Company Secretarial Team can help you every step of the way. If you would like to know more about this service, please get in touch with our CoSec Team today on , or email us at cosec qualityformations.

Alex Heshmaty is a legal copywriter and journalist, and founder of legal content company Legal Words. He has a particular interest in legaltech, DIY law and the ways in which technology can help individuals and small businesses to better understand and assert their legal rights.

Elimination of losses is one of the reasons for reduction capital. In general terms, we are unable to provide advice on specific financial and tax issues, and we would recommend you seek the advice of an accountant. If you would like us to refer you to Haines Watts, our accountancy partners, please let me know by emailing graeme qualityformations.

With regards your comment, hypothetically dividends would be payable to shareholders as long as the surplus capital is distributable. Your email address will not be published. There are three available options to reduce the company's share capital. You may decide to opt for one of these methods or to combine them, depending on your company's particular circumstances:. The company needs to be able to demonstrate to the court that, in the opinion of the directors, the loss of assets is permanent and as a result the reduction will not adversely affect creditors who have already been adversely affected by the event which has resulted in the permanent loss.

The reduction is then merely a restructuring of the balance sheet so that it reflects the reality of the company's financial and trading position. Evidence of the reasons for and details of the depletion in assets is not always essential but since the court's confirmation of a reduction of capital is discretionary, it is usually desirable to provide it.

The Companies Act sets out the requirements applicable to capital reduction. It should be noted that some companies may still be subject to the old act Companies Act and therefore a different set of requirements in relation to capital reduction. A private limited liability company will be entitled to utilise the power to reduce its capital under section of the Companies Act unless it is prohibited from doing so, or its rights to do so are restricted, by its Articles of Association.

A private limited liability company is entitled to reduce its share capital by special resolution supported by a solvency statement section 1 a.

This procedure sections to is only available if there is at least one member holding a non-redeemable share following the reduction. Companies which do not meet this requirement, private companies that are not limited by shares and public companies are required to follow the court approval route. Private limited liability companies can reduce their capital by shareholder approval special resolution supported by a solvency statement of the directors section 1 a. However, this procedure sections to will only be possible if there is at least one member holding a non-redeemable share following the reduction.

The solvency statement will need to be made available to the shareholders before the resolution is passed and it must be made 15 days before the resolution is passed section 1 a. Under sections 1 b of the Companies Act , the reduction of capital must be approved by a special resolution of the shareholders in general meeting or by written resolution section In the case of a general meeting, the solvency statement should be circulated and available throughout the meeting. In the case of a written resolution, the statement should be sent either before or at the time the resolution is circulated.

The resolution must be passed within 15 days of the statement being made. The resolution prepared by the board of directors must normally specify the exact amount of the proposed reduction. It will be necessary to explain to shareholders the background to and reasons for the reduction. This is generally done by way of a circular to shareholders compulsory for companies subject to the listing rules.

The special resolution will need to be filed with Companies House within 15 days of it being passed. The court approval route remains compulsory for public limited liability companies or private liability companies if there is not at least one member holding a non-redeemable share following the reduction.

Once the shareholders have approved the capital reduction, their special resolution has to be approved by the Companies Court. The company must apply for approval of the special resolution of its shareholders with the Companies Court.

This is done by submitting a Part 8 claim form. The first step before submitting such a claim form is to agree a timetable with the Companies Court. There are three key dates in the court timetable:. The claim form sets out the capital structure of the company including any alterations since incorporation , relevant provisions of its articles of association, its financial position and details of the reduction approved by the shareholders. A draft statement of capital should be attached.

The claim form must be supported by written evidence, in the form of a witness statement usually sworn by the company's chairperson, the purpose of which is to verify and expand on the contents of the petition. Typically, the written evidence will deal with the confirmation of the manner in which the resolution was passed; an explanation of the background to and purpose of the reduction and an explanation of the manner in which it is proposed to safeguard the interests of the company's creditors.

Where a circular has been sent to shareholders in relation to the proposed reduction, the company must show that all persons entitled to receive notice of the meeting did receive notice in accordance with the company's articles of association. If a company has a small number of members and a director or the company secretary has direct knowledge of the method of service, for example, having personally served the members, written evidence from that person will be sufficient.

However, where the company has a substantial number of shareholders, it will be necessary to produce written evidence from the company's registrars and the printers involved in the distribution of the notice. Upon submission of the claim form the company must also issue an application setting out various directions to be sought from the court at the directions hearing.

The Registrar of the Companies Court hears the claim in open court. It is unusual for an application to be opposed but if an opposition is formed, the Registrar will adjourn the matter to be heard by a judge.

If the Registrar considers that the opposition has little or no substance, he will hear the argument at that time. At the directions hearing the court considers two main issues: whether the appropriate approvals and consents have been obtained and the position of creditors.

If it is satisfied that the claim should proceed, the court will list it for final hearing and give various directions. If the court is satisfied that the claim should proceed, it will list the petition for final hearing and give various directions. Where the reduction involves the reduction or extinguishing of a liability on unpaid shares, or a repayment of capital to shareholders , there is a specific requirement for the court to ascertain the name of every creditor and the amount of their claims section 3.

The term creditor is therefore given a wide meaning and includes not only actual creditors but also contingent and prospective creditors. The court has discretion to make an exception with regards to the list of creditors and, in practice, most reductions of capital avoid this time consuming and burdensome procedure by adopting one or more of the following accepted protections for creditors:.

Under section of the Companies Act , a court confirming the reduction of share capital is a discretionary remedy. Confirmation may be refused if, amongst other things:. The court will not confirm a proposed reduction of capital unless it is satisfied that the interests of the company's creditors are not adversely affected by the proposal, which may depend upon the type of reduction of capital.

In the case of a reduction of capital that does involves a repayment of capital to shareholders or a reduction of liability in respect of unpaid capital usually where the reduction is to eliminate accumulated losses , the court has discretion to allow creditors to object.

Creditors must then show that there is a real likelihood that the proposed reduction would result in the company being unable to discharge its debt. The court will give confirmation of the reduction on such terms and conditions as it thinks fit section 1. Provided the company has satisfied all jurisdictional and procedural requirements, the Registrar will confirm the reduction.

The order of the court will provide for publication of the reduction. The reduction becomes effective upon registration of the order with the Registrar of Companies as follows:. With the court approval route, it is common practice for the claim and related documents to be prepared in advance and in anticipation of the special resolution being passed at the general meeting, so that the following documents can be filed with the court either the same day or the following day:. Within 15 days of the shareholders' resolution to reduce capital being passed, the company must file the following at Companies House:.

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