ACCA F4 - Corp and Business Law (ENG)

Part E Capital and the financing of companies  17: Capital maintenance and dividend law 259

A solvency statement is a declaration by the directors, provided 15 days in advance of the meeting where

the special resolution is to be voted on. It states there is no ground to suspect the company is currently

unable or will be unlikely to be able to pay its debts for the next 12 months. All possible liabilities must be

taken into account and the statement should be in the prescribed form, naming all the directors.

It is an offence for directors to deliver to the Registrar a solvency statement without having reasonable

grounds for the opinions expressed in it.

2.2 Why reduce share capital?

A company may wish to reduce its capital for one or more of the following reasons.

 The company has suffered a loss in the value of its assets and it reduces its capital to reflect that

fact.

 The company wishes to extinguish the interests of some members entirely.

 The capital reduction is part of a complicated arrangement of capital which may involve, for

instance, replacing share capital with loan capital.

There are three basic methods of reducing share capital specified in the Companies Act.

Method What happens Effects

Extinguish or reduce liability on

partly paid shares

Eg Company has nominal value

£1 shares 75p paid up. Either (a)

reduce nominal value to 75p; or

(b) reduce nominal value to a

figure between 75p and £1

Company gives up claim for

amount not paid up (nothing is

returned to shareholders)

Pay off part of paid-up share

capital out of surplus assets

Eg Company reduces nominal

value of fully paid shares from £1

to 70p and repays this amount to

shareholders

Assets of company are reduced

by 30p in £

Cancel paid-up share capital

which has been lost or which is

no longer represented by

available assets

Eg Company has £1 nominal fully

paid shares but net assets only

worth 50p per share. Difference

is a debit balance on reserves.

Company reduces nominal value

to 50p, and applies amount to

write off debit balance

Company can resume dividend

payments out of future profits

without having to make good

past losses

2.3 Role of the court in reduction of share capital

When the court receives an application for reduction of capital its first concern is the effect of the

reduction on the company's ability to pay its debts, that is, that the creditors are protected.

If the reduction is by extinguishing liability or paying off part of paid-up share capital, the court requires

that creditors shall be invited by advertisement to state their objections (if any) to the reduction. Where

paid-up share capital is cancelled, the court may require an invitation to creditors.

Normally the company persuades the court to dispense with advertising for creditors' objections (which

can be commercially damaging to the company).

Two possible approaches are:

 To pay off all creditors before application is made to the court; or, if that is not practicable

 To produce to the court a guarantee, say from the company's bank, that its existing debts will be

paid in full

Key term