A private company can reduce its capital in many different ways using new procedures for the reduction of capital under the Companies Act 2006. before these provisions came in a court order was required to reduce share capital.
A private company can now reduce its share capital without obtaining a court order under Companies Act 2006 (Part 17, chapter 10) . The capital reduction provisions came into effect on 1st. October 2009. Before that, in order to protect creditors, a reduction of capital other than a buy back always required a court order. The new procedure protects creditors by requiring the directors of the company to make a statement of solvency.
Why is it used?
The reduction of capital procedure is not required when a company buys back its own shares using the statutory procedures for that purpose, even when the buy back actually involves a reduction of capital because all or some of the purchase price is met by the company making a permissible capital payment.
The capital reduction procedure can be useful in a number of circumstances such as:
Thecapital reduction must be proposed by the directors and approved by the shareholders. The directors must make a statement of solvency. This is a formal statement, registered at Companies House, that they have enquired into the company's affairs and in their opinion the company is able to pay its debts and will be able to do so for the following 12 months. Making a statement of solvency without reasonable grounds is a serious criminal offence.
Reduction of capital may have tax consequences for the company and/or its shareholders. We do not give tax advice and strongly recommend that advice from the company's accountants is sought before proceeding.
In a straightforward case the benchmark pricefor a reduction of capital will apply, but some capital reductions involve complications and there will be additional charges. Contact us with details of the proposed reduction and we will provide a firm estimate before proceeding.