Reductions of Capital: a Practical Guide

A reduction of capital is a transfer within a company, from share capital into distributable reserves. Since dividends may only be paid with a company’s profits or reserves, a reduction can be used to create a profit for accounting purposes, or to cancel accumulated losses. The funds may also be used to finance a share buyback or redemption.

Alternatively, the reduction may be tied to a demerger: whereby the funds that are freed up are transferred to a newco who will issue shares to the original company’s shareholders. The newco and the original company are then free to pursue separate business activities within distinct legal entities but remain accountable to the same shareholders.

How to Reduce the Share Capital in your Company

Reductions of capital must be approved by 75% of shareholders via a special resolution. While public companies must then obtain court approval, private companies have the option of reducing their capital via a solvency statement signed by all of the directors.

Unusually for court proceedings, there is no ‘other side.’ Instead, a judge will scrutinise the documents put in front of the court and decide whether the proposed reduction of capital will prejudice the company’s creditors. This is the crucial test. After all, share capital is what is distributed to those out of pocket if the company goes into liquidation.

The fact that the hearings are uncontested, though the barristers being put through their paces by Companies Court Judges may disagree with this description, allows for greater certainty in preparing a timeline for the reduction. It is standard practice for the dates for the Directions Hearing (where initial issues are dealt with) and the Final Hearing (where the order confirming the reduction is given) to be fixed and included in the circular distributed to shareholders prior to the General Meeting at which the reduction resolution is approved.

Once the resolution has passed, the company must submit a suite of documents to the court. Witness statements from directors, as well as the registrars and printers, are usually required in order to satisfy the judge that creditors will not be prejudiced, and that the resolution was properly approved.

One, arguably anachronistic, safeguard for creditors imposed by law is that hearings must be advertised in a national broadsheet newspaper to allow anyone to appear in court to argue their case.

Following the Final Hearing, the reduction of capital is effective upon Companies House registering the sealed court order.

Keras Resources plc

Memery Crystal is pleased to have represented Keras Resources plc, an AIM listed mineral resource company, in respect of their recent reduction of capital. The reduction, which allowed the company to facilitate a demerger, was approved by the court last month.

The Memery Crystal team on this transaction was led by Partner Kieran Stone, and included Senior Associate Robert Black, and Trainee Solicitor George Jackson.