The solvency statement route for capital reductions in private companies is due to come into force on 1 October 2008.
It has long been a fundamental principle of company law that a court needs to approve a reduction of a company's share capital.
However, that is set to change with the introduction of the new solvency statement route, allowing private limited companies an alternative to the Court approved procedure for a share capital reduction from 1 October 2008 (public companies will still have to use the Court approved procedure).
In the solvency statement every director is required to state that he has formed the opinion that:
- as regards the company's situation at the date of
the statement, there is no ground on which the company could
then be found to be unable to pay (or otherwise discharge)
its debts;
- if it is intended to commence the winding up of the
company within 12 months of the date of the statement, the
company will be able to pay its debts in full within 12
months of the commencement of the winding up; and
- in all other cases, the company will be able to pay (or
otherwise discharge) its debts as they fall due during the
year immediately following the date of the statement.
The solvency statement must be supported by a special resolution of the members of the company and both must be filed at Companies House together with a statement of capital setting out the details of the share capital as reduced.
All of the directors must make the solvency statement, therefore, if one or more of the directors is unable or unwilling to make the statement, the company will not be able to take advantage of the solvency statement for the reduction of capital and will need to revert to the court approved procedure.
It is also important to note that in the absence of the Court approval procedure certain safeguards exist against abuse of the solvency statement route; namely, if company directors make a solvency statement without having reasonable grounds for the opinions expressed in it, and the statement is delivered to the registrar, an offence is committed by every director who is in default.
So why would a company wish to reduce its share capital?
A company may want to reduce its share capital for a variety of commercial, accounting and cosmetic reasons. For example, a company may wish to reduce its share capital in order to:
- write-off a deficit/accumulated losses on its profit and
loss account, so that dividends can be paid much
earlier.
- clean up its balance sheet so as to reflect more
accurately the capital employed in the business, where
capital has been lost.
- repay to shareholders part of its paid-up capital where
the capital is surplus to foreseeable requirements.
From October it will become easier and more cost-effective for private companies to take advantage of such options.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
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