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Companies: reduction of capital


A company can only reduce capital if its ariicles of association and memorandum of association permit. A special resution is required and the leave of the court must be obtained. Much depends on the reason for the reduction - it may be because the company is over-capitalized, or it may be because the company has lost capital by way of a very large trading loss. Where reduction of capital involves a return to shareholders, or a reduction in uncalled capital, the court will insist on an inquiry into the debts and liabilities of the company. It will settle a list of creditors and all these must consent or be paid off.

Where there is no return to shareholders or no reduction in liability, there will be no inquiry. This type of situation arises when capital is lost irretrievably: the shares may | be nominally of £100 each but represented by assets of only £10 each. It may be possible to make a profit on these assets and the company may wish to write off the lost capital by reducing capital from £100 to £10 per share. Creditors may not be affected but the rights of members inter se may be | altered. The court must approve the scheme but the creditors need not. In all cases of permanent reduction of capital, the court may order the words 'and reduced' to be added to the company's name.

Where capital is diminished by writing off uncalled capital an ordinary resolution is sufficient provided the articles do not require some other type of resolution. A forfeiture of shares is, strictly, a reduction of capital and is in fact the only type for which court sanction is not required.
Other means of reducing capital were introduced in the Companies Act 1981 and restated in the 1985 Act. A company can now redeem equity capital and, within ;i prescribed limits, purchase its own shares. Such shares redeemed or purchased must be cancelled, thus reducing issued share capital.
An additional consequence of the 1981 Companies Act is that where a public company reduces its capital to a figure below the 'authorized minimum', it must, unless a court order is obtained to the contrary, immediately take steps to register as a private company. A further point introduced by that Act is that. where net assets represent one half or less of paid-up share capital, then the directors must, within twenty-eight days, convene an extraordinary general meeting. For exampie, a company with paid up capital of £5,000 and net assets of £3,000 may use f 1,000 to redeem shares of that value. The net assets would then be only one half of paid-up capital and an extraordinary general meeting would need to be called.

Reference: The Penguin Business Dictionary, 3rd edt.