Definition
The reduction of capital is a process prescribed by the Companies Act 2006, which allows companies to reduce their share capital. This can be done by either cancelling unissued or issued shares or by returning excess capital to shareholders. The reduction must comply with various conditions and procedures set forth in the Act, which are designed to protect creditors and maintain the solvency of the company.
A private company may reduce its share capital provided that it:
- Passes a special resolution.
- Supports the resolution with a solvency statement.
- Ensures that the reduction is not restricted or prohibited by the company’s articles of association.
Alternatively, both private and public companies can reduce their share capital by:
- Passing a special resolution confirmed by the court.
- Ensuring any such reduction complies with their articles.
Additionally, a permitted redemption or repurchase of a private company’s own shares out of capital can also lead to a reduction of capital.
Examples
Example 1: Reduction by Special Resolution and Solvency Statement
A private company, XYZ Ltd., decides to reduce its share capital from $1,000,000 to $600,000 by cancelling some of its issued shares. It passes a special resolution and supports it with a solvency statement signed by the directors. The company’s articles do not restrict this action, and the reduction is completed as stipulated in the Companies Act 2006.
Example 2: Reduction Confirmed by the Court
A public company, ABC Plc., plans to decrease its share capital to balance its accumulated losses. The shareholders pass a special resolution. Since ABC Plc. is a public company, the resolution must also be confirmed by the court. After obtaining the court’s approval, the company legally decreases its share capital.
Frequently Asked Questions
What is the importance of a solvency statement in the reduction of capital?
A solvency statement, signed by the directors, attests that the company will remain solvent for at least one year after the reduction of capital. This protects creditors by ensuring the company can meet its liabilities.
Can a public company reduce its capital without court approval?
No, a public company must have the reduction of capital confirmed by the court, even if the shareholders pass a special resolution.
What conditions must be met for a private company to reduce its capital without court approval?
A private company must pass a special resolution supported by a solvency statement and ensure the reduction is not restricted or prohibited by its articles.
How does a reduction of capital affect shareholders?
Shareholders might receive a return of capital, face a write-off of shares, or see an adjustment in the nominal value of their shares. This can impact the share price and potentially the financial value to the shareholder.
Related Terms
- Special Resolution: A resolution of the shareholders that requires a higher majority (usually 75%) for approval.
- Solvency Statement: A declaration by the company’s directors attesting to the company’s ability to pay its debts.
- Share Capital: The total amount of money that a company owes its shareholders in return for shares.
Online References
Suggested Books for Further Study
- Company Law by Alan Dignam and John Lowry - A comprehensive guide covering the Companies Act 2006, including the rules pertaining to capital reduction.
- Gower’s Principles of Modern Company Law by L.C.B. Gower - Offers authoritative insights into modern company law including capital maintenance.
- Principles of Corporate Finance Law by Louise Gullifer and Jennifer Payne - Discusses various aspects of corporate finance, including the legal framework for capital reduction.
Accounting Basics: “Reduction of Capital” Fundamentals Quiz
Thank you for engaging with our in-depth coverage of the reduction of capital. To further your understanding and tackle the complexities of corporate finance, continue exploring our structured learning modules and challenging quizzes. Happy studying!
