Return of Capital
There may be critical points during a company’s lifecycle where it is appropriate and/or necessary for a company to reduce its share capital, such reductions must be done in accordance with the Companies Act 2006 and the set of circumstances outlined within the Act.
A company may consider reducing its share capital for the following reasons:
- Dividends – in a situation where a company has accumulated losses and no distributable reserves, reducing the share capital accordingly will eradicate those losses thus creating distributable reserves.
- Returning excess capital to shareholders – a company, for example, may find itself in a position where it has surplus capital due to raising funds for a subsequently aborted acquisition and wishes to return those excess funds to shareholders.
- Business reorganisation – where a company is pursuing a merger or acquisition or considering a demerger.
A company can reduce its share capital by passing a special resolution supported by a solvency statement alternatively by special resolution confirmed by the court. A public limited company will need to apply to court.
A reduction in share capital may form part of an overall corporate simplification (see Corporate Simplification and Demergers) strategy or where a company has reached the end of its life a solvent liquidation may be more appropriate (see Solvent Liquidations). Taking appropriate tax advice at each stage will be critical to determining the final strategy.
