This new procedure for private companies is part of the wider amendments introduced in order to simplify procedures. It has been referred to as a “do-it-yourself reduction”.
Companies may wish to reduce capital for the following reasons, amongst others:
- To eliminate a deficit on the company’s profit and loss account;
- To create a distributable reserve in the books of account which can then be used to pay dividends or used for other corporate purposes; and/or
- To return capital that is in excess of the company’s needs to the members.
These new sections allow a private company to reduce its share capital without court approval if:
- the directors are able to confirm that the company will remain solvent – ie basically able to pay its debts - for a year after the reduction ("the solvency statement"); and
- consent is given by the company's shareholders.
Directors must take care in giving the solvency statement. They must carefully enquire into the company's assets and liabilities and identify all possible liabilities, including contingent liabilities, before making the statement. Any director who makes a solvency statement without having reasonable grounds to do so commits a criminal offence which is punishable by two years' imprisonment and/or a fine.
The company must also pass a special resolution to approve the reduction. The company's articles may prohibit or restrict the use of this procedure, so they need to be checked before proceeding.
The reduction takes effect on registration by Companies House of:
- The special resolution;
- The solvency statement;
- A memorandum showing the new share capital; and
- A statement by the directors that the solvency statement was properly made and circulated to the members.
If the solvency statement can be made, this new procedure can be completed substantially faster than the existing court procedure, especially if the special resolution is passed in writing.
The court approval procedure under the Companies Act 1985 still remains for both public and private companies that do not wish to use, or are unable to use, this new procedure.
If you are interested in this new procedure please contact Helen Goose on 0117 918 1322 or email her at helen_goose@jordans.co.uk.
