REDUCTION OF CAPITAL
This page sets out a summary of the procedure for reducing a private or public company’s share capital with court approval.
Articles of association
If there is a restriction on reducing share capital in the Articles of the company then that restriction will need to be adhered to, or a special resolution passed to amend the Articles. Any amendment to the Articles will need to be completed before the special resolution is passed to approve the reduction.
Apply to court
An application to the court can then be made to confirm the reduction. The claim form is usually prepared in advance of passing the special resolution so it can be filed at court soon after the members’ resolution has passed.
Claim form contents
The claim form will set out, amongst other things, the company’s capital structure, its main objects, any relevant provisions of its Articles, its financial position and details of the reduction. The claim form will also seek appropriate directions from the court.
The claim form must be supported by a witness statement made by a director (commonly the chairman) to verify the claim form’s contents, the manner in which the resolution was passed, the background to the reduction, how creditors’ interests will be protected and confirming that all members have received notice of the special resolution.
The court will primarily be concerned that all consents have been obtained and that creditors are appropriately protected. If the reduction involves a reduction of liability on unpaid shares or a repayment of capital to shareholders, the court is required to settle a list of creditors. The company can avoid this process if it can show all creditors consent to the reduction or it can satisfy the court that creditors will be paid (e.g. the company has sufficient liquid assets to cover both the capital repayment and creditors, the company obtains a bank guarantee for creditor liabilities or the company undertakes not to repay any capital until creditors are paid off).
Once directions have been made a date will be set for the full hearing before the Registrar of the Companies Court which is usually unopposed. If it is opposed the hearing will usually be adjourned and then heard with full arguments before a judge.
Filings at Companies House
The court order confirming the reduction is one of the documents that needs to be filed with the Registrar of Companies (Companies House) before the reduction can take effect.