Sections 95 and 96 of the Companies Act 1997 are the company’s answer to a buy-out demand it cannot or should not meet.
Section 95(1) — discretionary exemption
(a) the purchase would be disproportionately damaging to the company; or
(b) the company cannot reasonably be required to finance the purchase; or
(c) it would not be just and equitable to require the company to purchase the shares.
The Court shall not make an order on either of the grounds in paragraphs (a) or (b) unless it is satisfied that the company has made reasonable efforts to arrange for another person to purchase the shares in accordance with section 92(2)(b).
So a company relying on damage or on inability to fund must first have genuinely tried to find a third-party buyer — typically the majority shareholder, a related company, or an incoming investor. Evidence of that search is part of the application. Ground (c), being just and equitable, carries no such precondition.
Section 95(2) — and the Court’s other orders
(a) setting aside a resolution of the shareholders;
(b) directing the company to take, or refrain from taking, any action specified in the order;
(c) requiring the company to pay compensation to the shareholders affected; or
(d) that the company be put into liquidation.
The list runs from the mild to the drastic. Paragraph (a) lets the Court simply unwind the resolution that triggered the buy-out — putting everyone back where they were, which is often the sensible outcome where the company cannot afford the consequence of its own decision.
Paragraph (c) is a middle course: exempt the company from buying the shares, but compensate the dissenting shareholder for the prejudice. Paragraph (d) is the last resort — a liquidation, which at least converts the minority’s position into a distribution of surplus assets.
The same range of orders appears in section 152, the prejudiced shareholder remedy, and the two are commonly argued together.
Section 96 — where the company would become insolvent
(a) a notice is given under section 92; and
(b) the board has resolved that the purchase would result in the company failing to satisfy the solvency test; and
(c) the company has, having made reasonable efforts to do so, been unable to arrange for the shares to be purchased by another person under section 92(2)(b),
the company shall apply to the Court for an order exempting it from the obligation.
Unlike section 95, section 96 is mandatory. Where the three conditions are met the company has no choice: it must go to Court. It cannot simply refuse to complete, and it cannot pay in breach of the solvency test.
That is consistent with the rest of the Act. A purchase under sections 91 to 93 is a permitted acquisition under section 56(1) and therefore a distribution; paying it while insolvent exposes the shareholders to recovery under section 54(1) and the directors personally under section 54(2).
Where satisfied that (a) the purchase would result in the company failing to satisfy the solvency test, and (b) the company has made reasonable efforts to arrange a third-party purchase, the Court may make —
(c) an order exempting the company from the obligation; or
(d) an order suspending the obligation; or
(e) such other order as it thinks fit, including any order referred to in section 95(2).
Paragraph (d) has no counterpart in section 95. It allows the Court to defer the obligation rather than extinguish it — keeping the shareholder’s right alive until the company can lawfully pay. That fits a company whose difficulty is temporary, and it mirrors the treatment of a buy-back contract under section 58(3), where the seller becomes a claimant entitled to be paid as soon as the company is lawfully able to do so.
Sections 95 and 96 compared
| Section 95 | Section 96 | |
|---|---|---|
| Application | May apply | Shall apply |
| Trigger | Disproportionate damage; cannot reasonably finance; not just and equitable | Board has resolved the purchase would fail the solvency test |
| Reasonable efforts to find a buyer | Required for grounds (a) and (b) | A condition of the section itself |
| Orders available | Exemption; set aside the resolution; direct action; compensation; liquidation | Exemption; suspension; any s 95(2) order |
| Timing | One of the board’s four options within one month of the s 92 notice | The same — s 92(2)(c) |
Practical guidance
- Model the cost first. Before proposing a major transaction or an amalgamation, estimate how many shares might be put to the company and whether it can fund the purchase.
- Consider abandoning instead. Section 92(2)(d) allows the board to rescind the resolution or decide not to proceed — usually cheaper than litigation.
- Document the search for a buyer. Both sections turn on reasonable efforts under section 92(2)(b); keep the correspondence.
- Pass and record the solvency resolution required by section 96(1)(b), with the reasoning.
- Act within the month. The application is one of the four options the board must take, and notify, within one month of the section 92 notice.
- Expect the shareholder to cross-apply under section 152. The Court’s powers under both provisions overlap, and it will look at the fairness of the whole transaction.
Sources
- Companies Act 1997 — ss 4, 50, 54, 56, 58, 88, 91–96, 99, 110, 152, 234
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.