Reduction of Share Capital, why reduce and what it entails

Introduction

The Companies Act, 2015 provides for the registration of Companies whose liability is limited by its Share Capital, that is, the amount of money the owners of a Company have invested in the business either as equity capital or preferred capital. Whereas a capital reduction is the lesser-known occurrence, the resultant effect of the corporate action is alteration of the Share Structure of the Company and is undertaken to reduce the Company’s issued or Nominal Share Capital.

Why Reduce Share Capital?

Companies may opt to reduce its Share Capital for various reasons, these include:

  • Following a merger in which the Share Capital of the target Company is reduced and the reserve capital to be paid to shareholders of the target Company transferred to the bidder in exchange for shares to be allotted to the shareholders of the target Company;
  • To match its Share Capital to its asset value- Companies may decide to cancel paid up Share Capital that is not represented in its assets;
  • To return surplus capital to shareholders in the event the Company has capital that is in excess of its requirements; and
  • To distribute non-cash assets of the Company to shareholders in exchange for cancellation of shares.

What does a Share Capital Reduction entail?

The Company is at liberty to reduce its capital, however, the Companies Act, 2015 takes into consideration and safeguards the interest of the creditors of the Company by restricting capital reduction to the below permissible means:

1. Through a reduction by a Court Order confirming the Resolution for reduction

This option requires the Company to demonstrate to the Court that, in the opinion of the directors, the reduction will not adversely affect creditors as it’s merely a restructuring of the balance sheet to reflect the Company’s actual financial position.

This shall entail:

  1. Passing of a Special Resolution approving the reduction of the Company’s Share Capital;
  2. Applying to the Court with a request that it issues an Order confirming the reduction and approving the Statement of Capital;
  3. A review of the application by the Court to determine its merits, basis for objections, if any, and if satisfied, issuance of a Court Order confirming the reduction and approving the Statement of Capital;
  4. Filing of the issued Court Order and approved Statement of Capital with the Registrar of Companies; and
  5. Issuance of a Certificate by the Registrar confirming that the reduction has been registered at the Companies Registry.

2. Through a reduction supported by a Solvency Statement 

This option requires the shareholders’ approval to be supported by a Solvency Statement of the directors and is only applicable to private Companies. The Solvency Statement is a confirmation that each director of the Company, having reviewed its’ financial position, has formed an opinion that there are no grounds on which the Company would be found to be unable to pay its debts.

The process shall involve:

  1. Passing of a Special Resolution approving the reduction of the Company’s Share Capital;
  2. Preparation of a Solvency Statement and a Statement of Capital confirming that each director of the Company has formed an opinion that no grounds exist on which the Company would be found to be unable to pay its debts;
  3. Filing of the issued documents with the Registrar of Companies; and
  4. Issuance of a Certificate by the Registrar confirming that the reduction has been registered at the Companies Registry.

This article is aimed at providing a general guide on the subject matter. Specialist advice should be sought about your specific circumstances.

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