News

Reduction of share capital of private companies

Release date: 26/09/2008

Under the Companies Act 1985, a company wishing to reduce its share capital was faced with an expensive and time consuming procedure, which involved making an application to the Companies Court.

From 1 October 2008, a new solvency statement procedure for private limited companies having a share capital will be introduced as an alternative to the court approved procedure for a share capital reduction (which will remain in place).

Under the new provisions, a company will be permitted to reduce its capital unless it is otherwise prohibited or restricted from doing so in its articles (a reversal of the current position where specific approval is required).

All of a company's directors are required to make a statement as to the solvency of the company, stating that they have formed the opinion that:
1. as regards the company's situation at the date of the statement, there is no ground on which the company could then be found to be unable to pay (or otherwise discharge) its debts
2. if it is intended to commence the winding up of the company within 12 months of the date of the statement, the company will be able to pay its debts in full within 12 months of the commencement of the winding up, and
3. in all other cases, the company will be able to pay (or otherwise discharge) its debts as they fall due during the year immediately following the date of the statement.

Within 15 days of the date of the directors' solvency statement, the members of the company must pass a special resolution authorising the reduction of share capital.

The special resolution and the solvency statement, together with a statement of capital, must then be registered at Companies House.

Although the new procedure greatly simplifies the process of reducing a private company's share capital, there are still a number of detailed technical requirements which must be observed.

It is therefore important that professional advice is taken before proceeding with a reduction of share capital.

For further details, please contact Rosie Prabhakar on (0116) 257 6138.