How to reduce the share capital of a company

Share capital represents the amount that the shareholders invest in a company. Share capital may be increased or reduced. If the shares are paid for then the shares are considered paid up. If shares are partially paid or have yet to be paid up then we classify this as unpaid share capital. The shareholders holding on to these shares are liable to make payment on these shares at a later date. Share capital, once paid, can be used for the day to day running of the company.
For a variety of reasons, share capital may be reduced. Here are some of the common reason why a company may decide to reduce its share capital.

1. The company may decide to return the surplus capital which it holds to its shareholders.
2. The company may want to reduce its capital as it may not have profits to pay dividends to its shareholders.
3. The company may want to reduce the number of shares so as to be able to make sustainable dividend payments.
4. The company may not require any more capital for current and future operations and thus may want to reduce the liabilities on shareholders holding onto shares that are not paid up.
5. The company may want to reorganise its capital structure to open up better financing options.

Thus the company can do one of three things.

1. It can cancel the liability for shareholders to pay the unpaid capital on their shares.
2. It can cancel any shares which have been paid up and the capital has been spent and is not represented by any asset on the balance sheet.
3. It can refund unused paid-up capital to shareholders.

There are two methods to reduce a company’s share capital

1. The court-approved method
2. The non-court-approved method

The court approved method:

1. The company must pass a special resolution through a general meeting and lodge the special resolution with ACRA.
2. The company must ensure that all creditors have consented to the reduction in share capital and that they are not adversely affected by the reduction.
3. The company can then apply to the court to approve the resolution and the capital reduction.
4. Once the court has approved the reduction, the company must file a copy of the court order and a notice containing the capital reduction with ACRA. This must be done within 90 days of the approval.
5. The company can then edit its shareholding according to the approved capital reduction.

The non-court-approved method:

1. The company must pass a special resolution through a general meeting and lodge the special resolution with ACRA.
2. The board of directors will need to make a solvency statement stating that the company can repay its debts in the next 12 months. It a director makes such a statement without any justification, he or she may be criminally liable. This statement can be made within 20 days before the passing of the special resolution.
3. The special resolution and solvency statement must be made publically available for inspection.
4. If the lodgement of capital reduction is approved, the information lodged will be made publically available for up to 1 months after the reduction.

If the capital reduction was done using the non-court-approved method, creditors may apply to the court to challenge the company’s application within 6 weeks of the resolution date. The court may cancel the capital reduction if the applicant is a creditor whose debt is outstanding and will be affected by the capital reduction of the company.
If there is a creditor objection, the company must give notice to ACRA about the objection. The creditor’s objection must be dismissed by the court and once the objection has been dismissed, the company must lodge a solvency statement, a statement from the company directors that all objections have been dismissed, the court order dismissing the objection and a notice containing information about the capital reduction.
The choice between a court-approved or non-court approved capital reduction is the decision of the company’s. Most companies prefer the court-approved method as it is final and more difficult for someone to file an objection. Also, the company directors will not need to make a solvency statement, thus reducing their potential liability.
When in doubt, seek legal advice or consult an experienced ACRA Filing Agent.

 

Yours Sincerely,
The editorial team at Acra Filing Agent

 

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