There are many reasons why a company may want to reduce its capital; it may wish to return to its members any capital it no longer needs, it may decide to create a reserve in the accounts which could be used for paying dividends or it may wish to eradicate a deficit on a profit and loss account.

The 2006 Act introduced a new procedure for private companies (as an alternative to requiring court approval) whereby reduction of capital could be achieved by way of the production of a statement of solvency. The company must provide a memorandum detailing the reduction when it notifies Companies House of the reduction in capital.

The solvency statement procedure enables private companies to reduce share capital without the cost, both financially and in time, of obtaining court approval. In order to use this procedure, a company must be able to demonstrate that approval has been sought and obtained from the shareholders in the company and that the company is solvent. The test for solvency in this instance is that the company is able to pay its debts for at least a year after the reduction takes place. A special resolution must also be passed and registered with Companies House.

If you require any further advice or assistance please contact Nick Traill or a member of the Commercial team at Wortley Byers on 01277 268301 or ntraill@wortleybyers.co.uk.

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