Reduction of capital (without court order)

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:

  • returning capital to shareholders by cancelling shares
  • reducing the nominal value of each share (e.g. the company has issued 1,000 £1 shares. It wants to return £500 to the shareholders by reducing each £1 share to a 50 pence share)
  • converting shares into debentures or other loan capital (a reduction of share capital)
  • cancelling share capital that is lost or unrepresented by assets (e.g. the company issued 1,000 £1 shares but has traded unsuccessfully so its assets are only worth £500. It can reduce capital by writing 50 pence off each £1 share. This is sometimes done before issuing new shares because the company cannot issue shares at a discount and investors will not wish to pay £1 for new shares when the existing shares are only worth 50 pence
  • cancellingor reducing a capital redemption reserve.

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.

Tax warning
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.

Our service
The Company Law Solutions service provides all required:

  • guidance as to the applicable procedures for the particular reduction of capital
  • directors' statement of solvency
  • notices of directors' meetings
  • minutes of directors' meetings
  • notices of shareholders' resolutions
  • shareholders' consents to resolutions
  • completed documents and official forms for Companies House
  • our straightforward, step by step guide to completing the procedures
  • checking by us when the documents are completed (if required)
  • dispatch by us to Companies House of the completed and checked documents (if required)
  • guidance on completion of statutory registers

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.