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Principal features of the new regime
- A private company will be able to use the new regime provided there is no prohibition or restriction in its articles which prevents it doing so.
- The key steps will be as follows:
- The directors will have to make a solvency statement in the prescribed form. This will have to confirm the solvency of the company both on the date of the statement and during the year following that date.
- The shareholders will then have to pass a special resolution reducing the share capital no later than 15 days after the directors have made the solvency statement.
- Within 15 days of the shareholders passing the resolution the company will have to file with the Registrar of Companies:
- the solvency statement;
- the special resolution;
- a statement of capital setting out the details of the share capital as reduced; and
- a further statement by the directors confirming compliance with the procedural requirements of the Act.
- The resolution reducing share capital will take effect on registration by the Registrar.
- A company will not be able to take advantage of this new procedure to reduce its share capital to zero.
Distributing reserves
Section 654(1) of the Act provides that a reserve arising from the reduction of a company's share capital is not distributable, but that the Secretary of State may relax this rule by secondary legislation.
Draft secondary legislation (the Companies (Reduction of Share Capital) Order 2008) is before Parliament and will come into force on 1 October 2008. This states that a reserve arising from a reduction supported by a solvency statement is to be treated as a realised profit for the rules on distributions.
Court approved reductions
The procedure for reducing share capital by court approved special resolution will continue to be available for both private and public companies. A public company wishing to reduce its capital will have to use this method.
The statutory rules for court approved reductions remain in the Companies Act 1985 (sections 135 to 141). The equivalent sections of the Companies Act 2006 will come into force on 1 October 2009. However, from 1 October 2008, section 654(1) of the 2006 Act will apply to court approved reductions. The Companies (Reduction of Share Capital) Order 2008 states that for such reductions the section 654(1) prohibition does not apply and the reserve is to be treated as a realised profit unless the court orders otherwise. This means the courts will keep the flexibility to allow the return of capital to shareholders outside the rules on distributions.
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