New route for private companies to reduce share capital
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| Introduction |
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| Under the Companies (Reduction of Share Capital) Order 2008, which took effect from 1 October 2008, private limited companies can reduce their share capital by the new solvency statement route. This does not require court involvement. |
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| If a company chooses the new route, it must pass a special resolution. |
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| If you are part of a private company limited holding shares registered in any part of the UK, read on. |
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| How to pass the special resolution |
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| Step one |
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| Not more than 15 days before passing the resolution, the directors must send to the shareholders (or make available at the meeting to pass the resolution) a solvency statement, which states in their opinion that: |
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- At that date there are no grounds on which the company could be found unable to pay or settle its debts;
- If it intends to start concluding business in the next 12 months, the company will be able to pay its debts in full within 12 months of ceasing operation;
- In any other case the company will be able to pay or settle its debts on time during the following year.
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| Step two |
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| The company must prepare a memorandum of capital depicting details of the reduced share capital. |
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| Step three: |
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- Within 15 days of passing the resolution, the company must deliver to the Registrar of Companies;
- A copy of the solvency statement and the resolution;
- The memorandum;
- A further directors' statement confirming that the solvency statement was made no more than 15 days before the resolution and a copy (or copies) sent or made available to the shareholders as required.
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| The alternative |
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| The old system of seeking a court order still applies. This new method simply introduces a choice. If directors do use the solvency statement route, they do not have to obtain professional advice. |
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| Distributions are subject to certain exceptions. Reserves resulting from a reduction of capital can be distributed as "realised profits" for the purposes of Part 23 of the Companies Act 2006. |
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| Public companies cannot use the solvency statement route. They must continue to reduce their share capital by a special resolution confirmed by court order. |
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| Need the legal documents? |
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A template solvency statement, memorandum and resolution are available to download from Net lawman using the links on this page. The documents come with full explanatory notes and a step by step ‘how to’.
Related document: Reduction in share capital
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