Update: this updates and replaces the June 2007 Practitioner Alert on this subject 

New provisions

Part 17 of CA 06: ss641 – 649, 654

When in force

1 October 2008

Companies affected

Part 17 generally applies to all companies, although some provisions are only relevant to private companies.

Summary of changes

  • Subject to consequential changes, the court-based procedure for a reduction of capital has remained broadly the same.
  • For private limited companies a new solvency statement procedure may now be followed instead of the court-based procedure. The new procedure requires that:

    > a statement of solvency must be made in accordance with s643 CA 06 by all of the directors not more than 15 days before a special resolution reducing capital is passed;

    > a special resolution must be passed; and

    > the special resolution along with the solvency statement and a statement of capital must be delivered to the registrar within 15 days of the passing of the special resolution.
  • In forming the opinions on which the statement of solvency is based, the directors must take into account all of the company’s liabilities (including all contingent and prospective liabilities).
  • A company no longer requires prior authorisation in its articles to reduce its share capital but a company may restrict or prohibit a reduction by making provision in its articles to that effect.
  • Since CA 06 makes general provision for the alteration of share capital, the alteration of capital provisions (including reduction of capital) found in CA 85 Table A articles are omitted from the draft CA 06 model articles for private limited companies.
  • Section 641(5) CA 06 confirms that a reduction of capital will become effective on registration of the solvency statement and statement of capital (or the court order and statement of capital) and that the resolution cannot specify a time later than that date.
  • Section 654(1) CA 06 states that any reserve arising from any reduction of capital is not distributable subject to order by the Secretary of State. The draft Order recently issued confirms that the reserve arising from:

    > a private limited company reduction of capital under the above process; or

    > an unlimited company reduction of capital; is to be treated as a realised profit. 

Implications for practice

  • A private limited company now has a choice whether it wishes to use the new solvency statement method or the old court approval method for reducing its capital (s641 CA 06). In either case (unless the court orders otherwise) the reserve arising will be treated as a realised profit.
  • The ICAEW is expected to revise Tech 01/08 to confirm that the reserve arising from a reduction of capital by a private limited company under the solvency statement procedure or by an unlimited company without court approval will give rise to a realised profit regardless of whether the consideration received for the capital was “qualifying consideration”.
  • For companies using the court approval method, if the court order confirming the capital reduction forms part of a scheme of arrangement under Part 26 CA 06, it can now be delivered to either London or Cardiff (unless the court orders otherwise) to become effective. If there is no scheme of arrangement, the court order must be registered at Companies House in Cardiff before it will become effective.

    May 2008



Peter Brien (partner)

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