Reduce Company Share Capital UK: Solvency Route Guide

Overview

A reduction of share capital is the formal cancellation or lowering of the nominal value, or the amount, of a company's issued shares. Private limited companies often do this to return surplus cash to shareholders, to eliminate accumulated losses sitting against the share premium or capital accounts, or to reorganise the balance sheet ahead of a sale, restructure, or group reorganisation.

Section 641 of the Companies Act 2006 gives private companies two options: an application to court, or the solvency statement procedure. The solvency route is quicker and cheaper, which is why most private companies use it. It works through four linked steps: the directors sign a solvency statement, the shareholders pass a special resolution supporting the reduction, the signed statement and resolution are filed at Companies House along with a statement of capital, and the reduction takes effect once registered.

Because directors are personally exposing themselves when they sign the solvency statement, the process should never be treated as a formality. The figures behind it need to be reliable, and the reasoning should be documented.

Key steps

1. Hold a board meeting and record the decision. The directors meet to consider whether a reduction of capital is appropriate, what form it will take, and how the company will remain solvent afterwards. The meeting should review management accounts and any relevant forecasts, and the minutes should record the rationale, the proposed resolutions, and the directors who approved them.
2. Sign the solvency statement. Every director must sign a solvency statement confirming, in their opinion, that the company can pay its debts as they fall due immediately after the reduction and for the following twelve months. The statement must be made no more than fifteen days before the shareholders pass the special resolution. Signing it without reasonable grounds is a criminal offence, so the directors need to be satisfied by the underlying numbers.
3. Pass a special resolution of the shareholders. The shareholders approve the reduction by special resolution, which requires at least 75% of the votes cast. Most private companies use a written resolution circulated to members, but a general meeting can be called if preferred. The solvency statement must be made available to every eligible member before or at the same time as the resolution is put to them.
4. Prepare the statement of capital. After the resolution is passed, the company prepares a statement of capital reflecting the new position: total number of shares, aggregate nominal value, amounts paid and unpaid, and the rights attaching to each class. This document needs to be accurate because it becomes the public record of the company's share structure going forward.
5. File with Companies House within fifteen days. The special resolution, the solvency statement, the statement of capital, and form SH19 must reach Companies House within fifteen days of the resolution being passed. The reduction takes legal effect only when Companies House registers the documents. Keep the originals on the company's statutory records and update the register of members to reflect the change.

Common questions