How Does a Company Reduce Its Share Capital in England?

Summary

• A company can reduce its share capital via a solvency statement (signed by all directors) or court order, both requiring a special resolution passed by 75% or more of shareholders.
• The solvency statement route is faster and more commonly used by private companies, but directors face criminal liability if the statement is made without reasonable grounds.
• Reducing share capital can create distributable reserves, though this may attract corporation tax liability.
• This article is a plain-English guide to share capital reduction in England, written for business owners and directors, produced by LegalVision, a commercial law firm.
• LegalVision specialises in advising clients on corporate law, including share capital reductions and company restructuring.

Tips for Businesses

Check your articles permit a reduction before proceeding. Use the solvency statement route where possible – it is quicker and avoids court costs. Ensure the special resolution and solvency statement are made within 15 days of each other, and file Form SH19 with Companies House promptly.

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On this page

• Why Would a Company Reduce its Share Capital?
• Methods for Reducing Share Capital
• Solvency Statement Route
• Court Sanction Route
• Practical Considerations
• Key Takeaways
• Frequently Asked Questions

Reducing share capital involves navigating complex legal requirements under the Companies Act 2006. A share capital reduction can create distributable reserves for dividend payments, return surplus capital to shareholders, clean up balance sheets, facilitate share buybacks or redemptions, or prepare a company for sale. This article explains when the law permits share capital reduction and the procedural steps directors must follow.

Why Would a Company Reduce its Share Capital?

Companies reduce their share capital for various reasons, including to:

• create distributable reserves enabling directors to authorise higher dividend payments;
• return capital to shareholders;
• rebalance the balance sheet so equity figures accurately reflect assets owned;
• redeem redeemable shares or buy back ordinary shares; and
• facilitate company disposal through a business sale.

Share capital reduction can also assist with company restructuring, preparing for sale by adjusting capital structure for potential buyers or investors, and resolving shareholder disputes by enabling buyouts and simplifying ownership arrangements.

Methods for Reducing Share Capital

A private company can reduce its share capital through:

• directors issuing a solvency statement; or
• court order.

Both methods require shareholder approval via special resolution (75% or more of votes cast) at a general meeting or by written resolution.

The solvency statement route is more commonly used than court sanction.

Solvency Statement Route

For a private company to reduce share capital via solvency statement, the company’s articles must not restrict this ability. The reduction cannot result in the company having no issued share capital, nor can it result in a single shareholder holding all shares.

The special resolution and solvency statement must be made within 15 days of each other. Directors must then file Form SH19 with Companies House within 15 days of the special resolution, accompanied by the:

• special resolution;
• solvency statement; and
• statement of capital showing the post-reduction share capital structure.

Court Sanction Route

To initiate share capital reduction via court sanction, directors must:

• check the company’s articles do not restrict share capital reduction;
• obtain shareholder approval via special resolution; and
• apply to court for confirmation of the reduction.

The court reviews the petition, considering creditors’ interests. Creditors entitled to object to the reduction may do so, and the court can require the company to provide security or undertakings to protect creditors before approving the reduction. If the reduction threatens creditors’ interests, the court will likely refuse confirmation.

Practical Considerations

Where share capital reduction creates distributable reserves, the law generally treats the newly-created reserve as realised profit, which can attract corporation tax liability.

Under the court sanction route, the court has power to direct that reserves be treated as other than realised profits, potentially affecting the tax treatment.

Company Registers

When you incorporate a company in England and Wales, you must maintain a number of company registers at its registered office or at the Companies House. This template includes these company registers.

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Key Takeaways

A company can reduce its share capital through two mechanisms: directors issuing a solvency statement (most common) or seeking court approval. Both require shareholder approval via special resolution.

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Frequently Asked Questions