Capital Reduction

Summary

The process of returning funds to shareholders through share cancellations and share purchases.

Suitability

• Private limited company
• Significant issued share capital
• Need to return capital to shareholders

Process

• All directors make a solvency statement that the company will be able to pay its debts as they fall due within twelve months
• Shareholders pass a special resolution

Directors Risk

• Liability and responsibilities of directors continues

Limitation Period to Restore

• N/A

Cost

• Low cost to draft resolutions and solvency statement

Pros

• Straightforward so can be carried out by management
• Less costly than liquidation
• Allows limited companies to repay excess share capital
• Not reliant upon the court
• Increases distributable reserves thereby easing restrictions on up streaming dividends through the group

Cons

• Requires subsequent strike off or MVL to close company
• Liability and responsibilities of directors continues
• A level of due diligence remains appropriate (i.e. on the adequacy of the assets against the liabilities of the company)
• Tax advice required