Reduction of capital

It is a fundamental rule of English company law that a limited company having a share capital must maintain that capital. Therefore, a company must not reduce its share capital, except as prescribed by law. This capital maintenance rule is intended to protect a company’s creditors by ensuring that the assets representing the capital of a company remain available to them for future recourse.

The Companies Act 2006 (CA 2006) sets out how a limited company having a share capital may reduce its capital. A reduction of capital in accordance with CA 2006, Pt 17, Ch 10 may be carried out using a special resolution supported by a solvency statement (the solvency statement procedure) or using a special resolution confirmed by court order (the court procedure). The solvency statement procedure is only available to a private company limited by shares—it cannot be used by any other type of company. In contrast, any limited company having a share capital (whether private or public) may take advantage of the court procedure.

Why reduce capital?

The most common reasons for a company to reduce its capital are:

•
to increase or create distributable reserves

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