25 July 2017 by Lorraine Young
The solvency statement method is the easiest way of reducing share capital for private companies, says Lorraine Young of Shakespeare Martineau.
Companies may need or wish to reduce their share capital for a number of reasons, including:
Capital reductions may be carried out by a process involving the court (sections 645–651 CA2006), which can be used by private and public companies.
They may also be carried out by a process using a solvency statement (sections 642–644), which was introduced in October 2008 when the relevant provisions of CA2006 were implemented. The solvency statement process is only available to private limited companies.
Both options require members to pass a special resolution to approve the reduction, however for several reasons the solvency statement route is preferred by private companies:
The court approval route is typically a lengthy process, with the company having to hold a general meeting with notice to approve the special resolution for the capital reduction before making the application to the court.
On receipt of the application, the court will review a list of creditors entitled to object to the reduction and then ascertain their wishes, taking such action as it sees fit to settle the claims of any dissenting creditors before later confirming the reduction.
“The court approval route is typically a lengthy process, with the company having to hold a general meeting with notice to approve the special resolution”
For example, the court may require the company to place funds in a ring-fenced bank account which may only be used to pay outstanding creditors.
The solvency statement route does not require the court’s confirmation, nor does it require the company to prepare a list of creditors (and creditors do not have the right to object to the reduction). Consequently, it is much quicker.
The court approval route requires a company to involve legal advisors from an early stage in the application process, as they will be responsible for preparing the documents for the court, so the company will incur professional fees that could be avoided by following the solvency statement route.
In addition, the court approval route requires the secretary of the company (and probably others involved with the process, such as the share registrars and mailing house) to swear an affidavit confirming that the requisite procedures, such as the issue of the notice and the date and timing of the mailing, have been dealt with correctly.
Detailed records have to be kept at each stage of the process.
When the capital reduction is confirmed by the court, the following must be sent to Companies House:
The share capital reduction takes effect from the date when the documents are registered at Companies House (section 649).
CA2006 now allows private companies to reduce their share capital by way of a special resolution supported by a solvency statement.
This can be done by any private company, providing that the company’s articles of association do not contain any provisions prohibiting the reduction of its share capital.
The company will need to prepare the following to carry out the capital reduction:
A statement of the company’s solvency needs to be prepared. This should be done no more than 15 days before the date of the special resolution and must be prepared in the format prescribed in section 643 CA2006.
It must contain statements confirming that, in the opinion of the directors, there are no grounds to suspect the company is currently unable, or will be likely to be unable, to pay its debts for the next 12 months.
“Directors may ask the auditors to prepare an independent financial assessment to provide additional comfort”
The statement must be signed by all directors, who should exercise proper consideration.
Directors may rely on an internal review of the company’s financial position or request that the auditor prepare an independent assessment to provide additional comfort.
The special resolution of members authorising the reduction can be proposed as a written resolution, in which case each member should receive a copy of the solvency statement before or at the same time as they receive the resolution.
Alternatively, if the resolution is to be proposed at a general meeting, the solvency statement should be made available to members throughout the meeting.
The resolution may not provide for the share capital reduction to take effect later than the date it has effect under CA2006, in other words when it is registered at Companies House.
The company must also prepare a statement by the directors confirming that the solvency statement was made not more than 15 days before the date on which the resolution was passed, and that the solvency statement was provided to members in accordance with the provisions of CA2006.
This statement must be made after the special resolution is passed, but before it is sent to Companies House.
A statement of capital, using Companies House Form SH19, will also need to be prepared. It is important to note that the statement of capital requires companies to reflect the position after the capital reduction has taken place.
All of the above documents should be submitted to the Registrar of Companies within 15 days of the date of the passing of the special resolution. There is a filing fee of £10, or £50 for a same-day service. The capital reduction is effective upon registration by the registrar.
“The solvency statement route offers private companies a much quicker and cheaper process for capital reduction”
Note that a company may not reduce its capital if as a result there would no longer be any member of the company holding shares other than redeemable shares.
The company should also consider the effect that the capital reduction may have on the resulting voting rights, in terms of whether the reduction will result in the proportion of voting rights between the different classes of shareholders being altered.
Also note that if a public company wishes to reduce its share capital, it may not reduce it below the authorised minimum for a public limited company, unless it first re-registers as a private limited company or the court authorises such a change in registration which may be effected without all the usual formalities.
While the solvency statement route to capital reduction is more straightforward, directors should satisfy themselves that they are fully aware of the financial position of the company before providing the solvency statement.
If the directors make a solvency statement without having reasonable grounds for the opinions expressed in it, and the statement is delivered to the registrar, an offence is committed by every director in default, which can lead to imprisonment or a fine, or both.
Even so, providing the company is in a robust financial position, the solvency statement route offers private companies a much quicker, simpler and cheaper process for capital reduction.