Practitioners familiar with older company law look for a capital reduction procedure in the Companies Act 1997 and do not find one. That is deliberate.
Section 39 — shares have no nominal value
(1) A share shall not have a nominal or par value.
(2) Nothing in subsection (1) prevents the issue of a redeemable share.
The old law protected creditors through capital maintenance: shares had a par value, the aggregate was the share capital, and the company could not return it to shareholders without a Court-sanctioned reduction. The figure was often meaningless — a K1 par value on a share issued for K100 — but the procedure was mandatory.
Under this Act there is no par value, no share capital account, and no capital maintenance rule. Creditors are protected instead by the solvency test in section 4, applied at the moment value leaves the company, and by the personal liability of directors who get it wrong.
The consideration for an issue is fixed by the board under sections 46 and 47, which require the board to be satisfied that it is fair and reasonable to the company and to all existing shareholders.
The three routes for returning value
| Route | Sections | Gate | Effect on shares |
|---|---|---|---|
| Distribution — including a dividend | ss 50–53 | Board resolution + solvency test + signed certificate | None — shares remain on issue |
| Purchase or acquisition of its own shares | ss 56–58 | Board resolution + solvency test + the offer procedure in s 57 | Shares are acquired — and generally deemed cancelled |
| Redemption of redeemable shares | ss 59–62 | The terms of issue + solvency test where redemption is at the company’s option | Shares are redeemed and cancelled |
Under section 50, the board may authorise a distribution only if it is satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test, and the directors who vote in favour must sign a certificate saying so and stating the grounds. Failing to sign is an offence.
Under section 4 the test has two limbs: the company must be able to pay its debts as they become due in the normal course of business, and the value of its assets must be greater than the value of its liabilities, including contingent liabilities.
Get it wrong and section 54 applies: the distribution is recoverable from the shareholder unless the shareholder received it in good faith, without knowledge of the failure, has altered their position in reliance, and it would be unfair to require repayment — and a director who failed to take reasonable steps is personally liable to repay the company.
Section 55 — reducing a shareholder’s liability is itself a distribution
Where a company proposes to alter its constitution, acquire shares issued by it, or redeem shares under section 60 in a manner that would cancel or reduce the liability of a shareholder to the company in relation to a share held before that alteration, acquisition or redemption, the proposed cancellation or reduction is treated (a) for the purposes of section 50 as if it were a distribution, and (b) for the purposes of section 51(2) and (3) as if it were a dividend.
Once it has happened, the cancellation or reduction is treated for the purposes of section 54 as a distribution of the amount by which the liability was reduced.
Where shares are partly paid, the unpaid amount is an asset of the company — section 36 makes the shareholder liable for it, and in a liquidation a liquidator can call it up under section 318. Releasing that liability is giving away an asset, and section 55 treats it exactly as if cash had been paid out: solvency test, certificate, and recovery under section 54 if it was wrong.
Under section 55(3) the same applies on an amalgamation: where a shareholder’s liability to an amalgamating company is greater than their liability to the amalgamated company, or is cancelled by the cancellation of the share, the reduction is treated as a distribution by the amalgamated company — whether or not that shareholder becomes a shareholder of it.
The other approvals that may be needed
- Interest group approval. Where the step affects the rights attached to shares, section 98 requires a special resolution of each interest group, and section 99 gives a dissenting shareholder a buy-out right.
- Constitutional alteration. Cancelling or varying a class of shares usually requires an alteration of the constitution under section 33 — itself a special resolution.
- Equal treatment. Under section 51, a dividend must be paid to all shareholders of the same class in proportion to their shares unless the constitution or section 53 provides otherwise, and the board must be satisfied it is fair and reasonable.
- The buy-back procedure. A purchase under sections 56 to 58 has its own offer requirements, disclosure and timing under section 57.
- Financial assistance is separate again: under section 63 a company may give financial assistance for the acquisition of its own shares only on the conditions there set out.
Distribute when it fails the solvency test. There is no Court-sanctioned route around section 4, and a directors’ certificate signed without reasonable grounds is unfairly prejudicial conduct under section 152(5).
Hold shares in its holding company. Section 64 prohibits it, and a liquidation is not an escape from the consequences of a distribution already made — section 54 recovery survives.
Where the real objective is to exit a shareholder rather than to shrink the company, consider instead a transfer, a short form amalgamation, or, in a dispute, the section 153 orders — which include an order that the company or another shareholder purchase the shares.
Sources
- Companies Act 1997 — ss 4, 33, 36, 39, 46, 47, 50–55, 56–63, 64, 91–96, 98, 99, 152, 153, 318
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.