Capital reductions: A new regime for private limited companies

From 1 October 2008, the new solvency statement procedure for private limited companies wishing to undertake a capital reduction becomes effective. The new regime is part of the wider scope of the Companies Act 2006 to reduce procedures and administrative burdens for private limited companies.

The Companies Act 2006 (the CA 2006) sees the overhaul of the capital reduction regime for private limited companies. The three principal changes under the Act are as follows:

• the introduction of the new solvency statement procedure for private limited companies as an alternative to the Court approved capital reduction procedure;
• a company no longer has to have specific authorisation in its articles of association permitting it to reduce its capital; however there may be a specific prohibition contained in the articles; and
• when a company notifies the Registrar of a reduction of its capital (Court approved or via solvency statement), the documents filed to allow the reduction to become effective must include a statement of capital setting out the details of the company's share capital as reduced (ultimately this will be in a prescribed Companies House form. However there are transitional arrangements for a period from 1 October 2008, allowing a memorandum to be filed showing, amongst other things, the company's share capital as reduced at the time of registration).

Private limited companies now have two routes to choose from should they wish to undergo a capital reduction. Firstly, the traditional Companies Act 1985 Court approved procedure which largely remains the same under the CA 2006 and secondly the new solvency statement procedure as prescribed by the CA 2006.

The intention of the new solvency statement is to create a streamlined capital reduction procedure which is cost effective for private companies. In theory, the solvency statement process can be carried out within a week (depending on the nature and history of the company and what financial information/due diligence needs to be undertaken to support the solvency statement).