New procedures for approving capital reductions are set out in the Companies Act 2014, which came into operation on 1 June 2015. A capital reduction is the means by which a company can reduce its capital in order to, among other things, create distributable reserves or return surplus capital to its members. Capital reductions can now be carried out, in certain cases, without seeking High Court approval, using a new Summary Approval Procedure. Where this procedure is not permitted or appropriate, High Court approval is required.
OPTION 1: SUMMARY APPROVAL PROCEDURE
The Summary Approval Procedure is a straightforward two-step procedure.
First, the company's directors must make a declaration in relation to a number of specified matters, including the financial position and solvency of the company. The declaration is accompanied by a report of the statutory auditor of the company stating whether, in the opinion of the statutory auditor, the declaration is not unreasonable.
Second, the company's members must pass a special resolution approving the capital reduction.
This procedure is not available to PLCs, which must obtain High Court approval for any proposed capital reduction.
OPTION 2: APPROVAL BY THE HIGH COURT
Where the Summary Approval Procedure is not, or cannot, be adopted, the company must apply to the High Court to have the resolution approving the capital reduction confirmed.
Under section 85(2) of the 2014 Act, before applying to the High Court, notice of the passing of the special resolution approving the capital reduction must first be:
- advertised at least once in a daily newspaper circulating in the district of the registered office or principal place of business of the company; and
- notified by ordinary post to all creditors of the company who are resident, or have their principal place of business, outside Ireland.
Given that PLCs, or other large private companies, may have a large number of international creditors, the requirement to notify all non-Irish creditors may prove to be a substantial undertaking.
The application will then come before the High Court for initial directions and to get a date for the final hearing of the application. In making directions and in fixing the hearing date, the 2014 Act requires the High Court to have regard to the company's compliance with the advertisement and notification requirements.
No further advertisement or notification of the passing of the resolution is required. However, the High Court will generally require that the date and time fixed for the final hearing of the application also be advertised, so that any interested parties (such as a company's creditors) can attend and object to the application if they wish. Therefore, a company may be required to advertise twice – first, when the special resolution approving the capital reduction is passed and, second, after the High Court has fixed the final hearing date for the application. Depending on the particular creditor base of the company in question, this may involve placing advertisements in a number of international newspapers. While the prudent approach is to always advertise the passing of the resolution before any initial directions hearings, in line with what is envisaged by the 2014 Act, the High Court has, in a number of recent applications, demonstrated a willingness (by reference to the particular circumstances of the company in question) to permit a single, combined notice (combining notice of the passing of the resolution and of the final hearing date) to be placed after the initial directions hearing.
The High Court (Barrett J) considered the notification requirements in the recent decision of Permanent TSB Group Holdings PLC v McManus & Others. The Court noted that the purpose of section 85(2) is to alert creditors to the passing of a resolution in respect of the proposed capital reduction and of the intention to apply to the High Court for confirmation of that resolution. It is not to protect company members, who should have been notified of the proposal to adopt the resolution, and who had the opportunity to attend and vote at the meeting at which the resolution was adopted.
Furthermore, the High Court noted that non-compliance with the advertisement and notification requirements does not invalidate any procedures or steps taken afterwards. Rather, imperfect compliance is something the High Court will consider in setting directions in respect of the final hearing of the application.
The Court noted that there is, in any event, an element of "in-built" non-compliance in section 85, as "creditors move and the post fails". Barrett J stated that it therefore must be the case that the law expects good faith, and substantive compliance with the notification requirements of section 85(2), rather than proof that every single creditor to whom a letter was sent continued to reside at the relevant address, and actually received the letter.
FACTORS TO BE SATISFIED
Barrett J reiterated that the High Court has discretion in relation to whether or not to approve a capital reduction, and identified a number of factors that must be satisfied before a proposed capital reduction will be confirmed:
- The company's constitutional documents do not prevent it from reducing its capital;
- The company has resolved by special resolution to reduce its capital;
- The reduction proposals have been properly explained to shareholders so that they could exercise an informed judgment prior to voting on them;
- The reduction of capital is for a discernible purpose;
- All shareholders are treated equally; and
- The creditors of the company are safeguarded.
CAPITAL REDUCTIONS IN IRELAND UNDER THE COMPANIES ACT 2014
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.