When a company has more share capital than it requires, a capital reduction would be an efficient method of either increasing its distributable reserves or repaying the excess capital to its shareholders. Another reason why a company would consider reducing its share capital is entering into a demerger or other type of restructuring process.

These processes are strictly regulated by law, as it could have serious implications for the company, creditors, and its shareholders. The Companies Act 2006 establishes the circumstances in which the company may do so or exceptions in which a company is not allowed to proceed. Any company, prior to commencing any capital reduction, demerger or restructuring process, may require specific tax and accountancy advice to assess its liabilities, whether it will remain solvent after its reduction of capital has taken place, and also to ascertain whether it requires tax clearance from HMRC prior to the restructuring process.

The company’s articles of association may also require amendment, as on many occasions they prohibit the reduction of share capital or impose restrictions on it.

A private company limited by shares has two mechanisms to reduce its share capital, by following either the (i) Court Procedure or (ii) the Solvency Statement Procedure, however, a public limited company can only reduce its capital by seeking the Court Procedure.

If a company wants to reduce its share capital to zero, then it must follow the Court Procedure as the law does not allow a company to reduce its share capital to zero using the Solvency Statement procedure. The most common and fastest mechanism is the Solvency Statement Procedure.

The main steps required to complete the Solvency Statement procedure are as follows:

1. Solvency Statement: the directors of the company, within the 15-day period before the Special Resolution to reduce the share capital is issued, are required to make a statement in which they declare that in their formed opinion (by taking into account all of the company’s liabilities) (i) there is no ground on which the company, at the date of the statement, will not be able to pay its debts; (ii) that the company will be able to pay its debts during the 12 months following the date of the statement, or (iii) if the company intends to commence the winding up of the company within 12 months of that date, that the company will be able to pay its debts in full within 12 months of the commencement of winding up proceedings.
2. Special Resolution: as this process have an impact on the rights over the shares of the company and the rights of the shareholders, the current members of the company have to pass a special resolution approving the capital reduction. If the shareholders of the company do not pass the special resolution, then the process cannot be completed
3. Compliance Statement: the directors must confirm that the Solvency Statement was provided to the members at the time of the circulation or consideration of the Special Resolution and that it was made within the 15-day period before the resolution was passed.
4. Statement of Capital (Form SH19): this is the final document to be prepared by the company and required to complete the reduction of share capital. It includes the issued share capital of the company following the reduction of its share capital, the number, class and prescribed particulars of the rights attached to the shares and the aggregate nominal value.

Following the completion of the above steps and of the passing of the Special Resolution, the company must register with the Registrar of Companies the above documents and it is not until the registration has taken place at Companies House that the reduction of capital takes effect. However, if a default is made in following the above process, then an offence is committed by the company and all of the company’s officers who are in default.

If you require further information or assistance on any of the points listed above, please contact MKB Law’s Corporate and Commercial department.