Reductions of capital - are you in a dividend trap?

This is a reminder that under the Companies Act 2006, private companies may now carry out reductions of capital (eg by cancelling shares) without having to go to court.?

?

Key to the new process is that all, but not some, of the directors make a statutory statement to the effect that the company is and for 12 months will remain solvent.? See especially CA 2006 sections 642 and 643.

?

This is onerous for directors but shortens the process from a minimum of about 90 days (60 if a written resolution can be used instead of holding a general meeting on 21 days' notice) to a minimum of about 20 days.? As well as shorter the new procedure is far simpler and likely to be cheaper.

?

So why do companies reduce their share capital??

?

Cancelling shares will produce a sum of a corresponding amount which can be credited to the company's P&L account, ie its distributable reserves.? Where the sum takes the reserves from deficit to credit the company comes out of a dividend trap; it will recover its ability to make distributions to the extent of the surplus.? If already having a credit on P&L the reduction will provide additional distributable reserves.

?

The reduction allows the return money to shareholders when a company's capital exceeds its needs, whether as a result of a specific transaction for which capital was raised and which will no longer proceed, or because the company's foreseeable capital expenditure simply does not require the capital currently invested.

?

A reduction can be used to distribute assets, to support the redemption of redeemable shares and to carry out a scheme of arrangement involving the cancellation of shares as well.

Go back

Subscribe to our RSS feed