Articles & Updates

Maintaining a good relationship with your shareholders is more important than ever, particularly in the current climate.

Higher rate paying UK shareholders will be keen to receive a sizeable dividend in this tax year before the higher rate income tax increases next year. For many companies, accumulated losses on their balance sheet will prevent them paying a dividend whereas with a share capital adjustment, they may be able to make distributions.

Does this affect you?

It may be that your company's underlying trading and profitability are in good health but a deficit on your profit and loss account from, for example, recent write downs of assets appears to create an insurmountable block on the ability to pay dividends.

Eliminating any accumulated losses and creating distributable reserves through a reduction of share capital may make it possible for a distribution to be made.
The new Companies Act 2006 has introduced a simpler, quicker and cheaper procedure for a private company to reduce its share capital.

It must:

• pass a special resolution of its shareholders
• each of its directors must make a statement that it can pay its debts now and during the course of the following 12 months.

What to do:

• consider if your company is sufficiently robust to pay a dividend
• if so, consider if there are sufficient distributable profits
• if not, consider whether you may be in a position to reduce your share capital to create distributable reserves

For example

Problem 1: A Ltd has a deficit on its profit and loss account of £5m, so is unable to pay a dividend to its shareholders. However, it has a share premium account of £7m.

Action: With shareholder approval supported by solvency statements from each of its directors, A Ltd can cancel its share premium account, eliminate £5m accumulated losses to create distributable reserves of £2m, and pay a dividend.

Problem 2: A subsidiary of X plc, Y Ltd, has a deficit on its profit and loss account of £2m. Y Ltd is a holding company for a number of subsidiaries, some of which have been making a profit. Y Ltd has 5,000,000 ordinary shares of £1 each in issue.

Action: With shareholder approval from X plc supported by solvency statements from each of its directors, Y Ltd can reduce its share capital from £5m to, say, £1m to eliminate its accumulated losses of £2m, create distributable reserves of £2m and in the process release the dividend block between X plc and its subsidiaries.

If you require any further information on either private or public company reduction of share capital procedures, please contact a corporate finance solicitor on 0800 840 4929 or by email or your usual contact in the corporate finance team, who will be pleased to help.