Summary of Key Steps for a Reduction of Share Capital for a Hong Kong Company Hong Kong SAR Global law firm

Dissecting the first factor; the court reasoned that it was the responsibility of the court to protect the interest of the minority of the shareholders which are dissenting per se [Re. Thus, it was considered that it was the policy of the legislature that the majority should provide a justification for capital reduction and the manner in which it shall be carried out. In uncertain economic times like these, we often see companies undergoing restructuring or being put under pressure to return capital to shareholders. As a practical matter, directors should ask an auditor or accountant to help them prepare the statement and keep a record of their decision and the reasons they believe the company is solvent. They should also show that they have carried out a risk assessment with respect to the company’s trading future and considered any other factors relevant to the company’s commercial activities. A reduction in the capital redemption or share premium reserve will create a realised profit.

E.g. the shares are of face value Rs. 100, each fully paid, can be lowered down to the face value of Rs. 75 per share by paying back Rs. 25 per share to the shareholders. In contrast to capital reductions, share buybacks are most commonly used to enable a shareholder to exit a company, where the existing shareholders are unable or unwilling to fund the purchase of the departing shareholder’s shares. They are also used to return cash to shareholders, to change the respective shareholdings of individual shareholders and in connection with employee incentive schemes. Where a business wants to split out its business activities into different companies, it may choose to demerge them. In a capital reduction demerger, the parent company in a group of companies reduces its capital and transfers the shares of the subsidiary that it wishes to demerge to a new company, whose shares are then issued to the shareholders of the parent company.

1. Reducing share capital can be a complicated and time-consuming process.
2. Creditors must submit their application within 6 weeks from the date the special resolution was passed.
3. Income tax and social security reliefs also apply on earlier exercises in certain take over and ‘good leaver’ situations.
4. Often, capital reductions are used to structure mergers, acquisitions, and group reorganizations.
5. A cancellation of a share for no consideration is a reduction of share capital, but paragraph (b) does not apply to this kind of reduction.

A capital reduction can also be done when shares are cancelled for zero consideration. If a company has more authorized share capital than it needs, it may
choose to reduce its share capital to improve its financial position. This can
be done by returning capital to shareholders or by canceling unissued shares. Section 66 of the Companies Act, 2013 (“Act“) lays down the requirements and provides disclosures for reducing the share capital.

An Overview of Share Capital Reductions – All You Need to Know

A reduction of share capital occurs when any money paid to a company in respect of a member’s share is returned to the member. Or the same resolution could combine a repayment of 1,000,000 £1 shares repaid £1 each and cancelled and the reduction of the £490,000 share premium account. Directors must go through the following steps in order to perform a reduction of capital supported by solvency statement.

Special Resolution Supported by a Solvency Statement

Where the resolution reduces the liability for uncalled share capital (e.g., £1 shares 75p called, reduced to 75p nominal value, thereby eliminating the uncalled 25p), no accounting entries would be required. However, the accounts disclosure for share capital would reflect the new reduction of share capital status of the shares in issue (e.g. now 75p shares not £1 shares 75p called). The above steps assume a company only has one class of shares in issue and that there are no other requirements in its articles of association, shareholders agreement or other binding arrangement.

A private unlimited company can reduce its share capital if the Articles of Association allow it to, and there is at least one non-redeemable share in issue after the procedure. There are various reasons why a company might want to reduce its capital. Section 641 of the Companies Act 2006 allows, for all companies, a reduction of share capital by way of a special resolution of the members, which sets out and approves the transaction, which is then subject to court approval.

The balance sheet may have fictitious assets with debit balance in profit and loss account, and the assets are overvalued. In this situation, to reduce the share capital, this portion will have to be written off; only then will the balance sheet look good. Because the target company’s share capital is reduced to zero, the capital reduction will need to be court approved, as the solvency statement procedure is not appropriate. A reduction of capital may be used in the context of a scheme of arrangement whereby a corporate group is reorganised. In this process, the target company’s shares are cancelled by way of a reduction in capital.

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Special conditions for single member companies

Despite a company’s wish, it cannot redeem its shares without enough distributable reserves. According to UK company law, subject to certain limitations, shares may only be redeemed with the proceeds from the issuance of new shares or with the company’s distributable profits. In the event of a loss or if it does not have enough distributable reserves to redeem its shares and does not intend to issue new shares, a corporation may decide to lower its capital. After that, the shares are redeemed for cash equal to the proceeds of the redemption. Although it is uncommon, a business might employ a capital decrease to give its shareholders ownership of actual assets. Shareholders receive distributions from their assets as payment in return.

If the necessary steps are taken to protect creditors, the value of the distributed property may be greater than the amount by which the share capital is diminished. It can be used to simplify a company’s capital structure, making it more efficient. It can also be used to distribute dividends to shareholders, increasing their value.

The resulting reserve is capitalised and paid up shares issued to a new holding company in exchange for the issues of shares by that holding company to the target’s shareholders. The reduction of share capital can be undertaken by a company for
various reasons, such as to eliminate accumulated losses, to return capital to
shareholders, or to adjust the capital structure of the company. However, it
must be noted that the reduction of share capital cannot be used as a tool for
reducing liabilities, nor can it be done to evade statutory obligations or
defraud creditors.

It could boost shareholder value and help create a more effective capital structure. However, it leads to a decrease in the number of shares that are outstanding and tradable. A copy of the court order confirming the reduction must be filed at Companies House together with a statement of capital, and the resolution to reduce the share capital becomes effective once those documents have been delivered to Companies House.

The court will usually agree to a capital reduction if it’s happy that the company’s creditors agree, or if the company will take steps to protect them, and it’s satisfied that the shareholders have been properly informed, and the proper procedure followed. If a company has capital that will no longer be needed shortly, it may decide to return it to its shareholders. This often happened when a large number of shares were issued to finance a deal that never took place.

In particular, the company has the right to cancel or reduce its obligation to reimburse partially paid-up shares, repay capital that has been paid up more than the company’s requirements, or pay up shares that are not represented by lost or accessible assets. Before deciding to reduce capital, https://1investing.in/ a company’s directors should be aware of how crucial it is to make sure all standards are satisfied. Reducing share capital can be a complicated and time-consuming process. The danger of potential liability for directors is augmented by the wider implementation of solvency requirements.