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 a solvency statement route.
This does not require court involvement, but rather the shareholders of the company must pass a special resolution.
How to pass the special resolution
Step one
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:
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.
Step two
The company (through the directors) must prepare a memorandum of capital depicting details of the reduced share capital.
Step three
Within 15 days of passing the resolution, the company must deliver to the Registrar of Companies (Companies House):
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.
The alternative - through a court order
The old route of seeking a court order can still be followed. This new method simply introduces a choice. If directors do use the solvency statement route, they do not have to obtain professional advice.
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.
Public companies cannot use the solvency statement route. They must continue to reduce their share capital by a special resolution confirmed by court order.
Further information and relevant documents
You may be interested in reading further about authorised and issued share capital or the process for winding up an insolvent company.
You can download template documents for reducing share capital - a model solvency statement, a memorandum and resolution from Net Lawman.