Introduction to this document

Reduction of share capital summary

If a company needs to reduce its share capital, it must follow one of two procedures. Use our summary to guide you through the process.

Exception to the rule

A company’s share capital can only be reduced in certain circumstances because it deviates from the golden rule that companies have to maintain their level of share capital to protect their creditors. Sometimes, however, a company needs to reduce its share capital, so the Companies Act 2006 sets out two procedures that a private company can use to achieve this, making sure that creditors are not put at a disadvantage as a result.

Our summary takes you through the main reasons why a company might need to reduce its share capital, and how it can achieve this, as well as the procedural steps to follow. There are other statutory procedures that can result in a reduction in share capital, such as when a company redeems or purchases its own shares. In these cases, there is no need to follow the reduction of capital procedure as well because the creditors are adequately protected already.

Court or out of court?

Companies used to have to apply to court to be able to reduce their share capital so it could ensure that creditors were not prejudiced and had an opportunity to object. Under the Companies Act 2006, private companies have a choice. They can carry out a reduction out of court if the directors prepare a “solvency statement”. This certifies that the company is solvent and will remain so for the next twelve months. This statement cannot be made lightly: any director making a statement without reasonable grounds for doing so could be fined, imprisoned, disqualified and/or sued by their company for breach of duty.

The alternative is to apply to court, which of course takes longer and is more costly. Public companies have to go down the court route. Private companies can choose to, but would only use this procedure if, for example, not all of the directors are able or willing to make the solvency statement.