CAPITAL MAINTENANCE AND DISTRIBUTIONS
Capital maintenance and distributions
AIMS AND OBJECTIVES
After reading this chapter you should be able to:
Understand how share capital can protect a creditor and why its relevance declines over the life of a company
Explain the scope of ‘capital maintenance’ laws
State the minimum share capital requirements
Appreciate the exceptions to the prohibition on reduction of share capital
Advise on the court approval and solvency statement procedures for reducing share capital
Advise on the procedures available to acquire and redeem shares, including out of capital and for the purposes of an employees’ share scheme
Appreciate statutory and common law restrictions on distributions
Recognise potentially disguised distributions
Understand how the legal restrictions are relaxed for distributions in kind
Discuss the remedies available for payment of unlawful distributions
State the shareholder last principle
Know the rules governing company political donations
Recognise financial assistance and know when it is prohibited
In the previous chapter we learned about a company’s share capital. We know that the share capital of a company is the number of issued shares × nominal value of those shares (100 × £1 = £100, for example). On registration, a company begins life with its initial share capital, which it can increase from time to time by issuing more shares. The company uses its share capital to fund its trading operations with the aim of making profits. The company may supplement its share capital by incurring debt, i.e. borrowing money from creditors to fund its trading operations.
In this chapter we review the laws governing minimum share capital and the reduction of share capital. We examine the importance of share capital to creditors and we also examine the laws regulating other actions by which companies return money to shareholders, principally by distributions. Together with the shareholder last principle, these laws are often referred to as ‘capital maintenance’. We then look at the broader issue of how the law regulates gratuitous payments by a company to non-shareholders, including political donations. The final section of this chapter deals with the prohibition on a company giving financial assistance for the purchase of its own shares which is an extension to the prohibition on a company buying its own shares but is aimed at a different mischief.
8.1.1 Can share capital protect a creditor against company trading losses?
At the start of a company’s life, a financial creditor will be very interested to know how much share capital the company has before the creditor will be prepared to lend money to the company. The creditor wishes to be paid interest on any sum it lends to the company and to be paid back that sum at the point, or various points, in the future at which it becomes due and repayable.
If a company has a negligible share capital, virtually the entire risk of the company making trading losses lies with the creditor. Every £1 the company loses in trading is £1 it cannot pay back to the lender. The creditor may have a legal right to sue the company to recover the sum contractually due and payable to it but that right is only valuable if the company has the money to pay the sum due (see Example 1 below).
If, however, a company has substantial share capital, the risk of the company making trading losses lies with the shareholders up to the amount of the share capital. Every £1 the company loses, up to the amount of the share capital, is a loss borne by the shareholders. This is because the shareholders cannot insist on taking their capital back from the company whilst it is a going concern and, if the company is wound up, its shareholders are only entitled to receive money back from the company after all the creditors have been paid in full (the shareholder last principle) (see Example 2 and section 8.6).
The company may not reduce its share capital and return money to its shareholders (except as authorised by, and subject to compliance with procedures in, the 2006 Act) and the company cannot pay money to shareholders, whether in the form of dividends or otherwise, unless the company has profits out of which to make the payment.
The following examples illustrate the importance of share capital in the early stages of a company’s operation. They also introduce you to the concepts of assets, liabilities and capital in the balance sheet of a company. Understanding the basics of how share capital and profits and losses affect a company’s balance sheet is essential to understanding capital maintenance. The following examples are simplified to demonstrate the basic principles.
Example 1: A company with virtually no share capital
Company A Ltd is registered with a share capital of £1 made up of 1 × £1 ordinary shares, fully paid-up. Company A Ltd borrows £1,000 from B, repayable in 12 months. Company A Ltd has assets of £1,001. This is stated in its balance sheet as follows:
Balance sheet of Company A Ltd as at 1 January 2013
Cash at bank
Sum owed to B
1 (number of issued shares × nominal value)
The basic balance sheet equation, or accounting equation, is:
Assets = Liabilities + Capital
‘Capital’ is made up of a number of components; the main ones are:
Capital = share capital + share premium + reserves (accumulated profits and losses)
The only component of capital in the above balance sheet is share capital.
‘Net assets’ is also an important concept:
Assets – Liabilities = net assets
£1,001 – £1,000 = £1
Net assets is also equal to Capital. In this balance sheet, net assets is equal to the share capital because share capital is equal to the Capital but net assets will not always equal the share capital. Indeed, the moment the company has profits or losses its net assets will diverge from its share capital, as the following 1 January 2014 balance sheet of Company A Ltd shows.
Company A Ltd trades for 12 months and incurs trading losses of £500. It then has £501. B demands repayment of the £1,000 owed and due to it from Company A Ltd. Even if B sues Company A Ltd, the most it can receive is £501 because that is all the money Company A Ltd has. The balance sheet now looks as follows:
Balance sheet of Company A Ltd as at 1 January 2014
Cash at bank
Sum owed to B
1 (number of issued shares × nominal value)
Profit and loss
(500) (accumulated profits and losses)
Brackets around a number indicate that it is a negative number. Note that the share capital amount remains the same. It reflects the number of shares in issue and their nominal value. It does not change unless more shares are issued (a share capital increase) or issued shares are cancelled (a share capital reduction). In this balance sheet, net assets is:
Assets – Liabilities
£501 – £1,000 = (£499)
This is not equal to the share capital of £1 because there are two components to Capital: share capital and accumulated profits and losses. The accumulated profits and loss here is a loss of £500, so Capital is:
share capital + profit and loss (accumulated profits and losses)
£1 + (500) = (£499)
The shareholders cannot receive their share capital back from Company A Ltd whilst the company is a going concern. The company cannot pay a dividend to shareholders because it has no profits available for the purpose (it has made a loss). B is entitled to all the assets of the company. Even if he receives them he remains only partly repaid. He has borne all but £1 of the trading risk of the company; he has absorbed all but £1 of the trading losses.
Example 2: A company with substantial share capital
Company C Ltd is registered with a share capital of £1,000 made up of 1,000 £1 ordinary shares, fully paid-up. Company C Ltd borrows £1,000 from B, repayable in 12 months. Company C Ltd has assets of £2,000. This is stated in its balance sheet as follows:
Balance sheet of Company C Ltd as at 1 January 2013
Cash at bank
Sum owed to B
1,000 (number of issued shares × nominal value)
Company C Ltd trades for 12 months and incurs trading losses of £500. It then has £1,500. B demands repayment of the £1,000 owed and due from Company C Ltd. Even though Company C Ltd has lost £500, it is still able to repay B.
Balance sheet of Company C Ltd as at 1 January 2014
Cash at bank
Sum owed to B
1,000 (number of issued shares × nominal value)
The shareholders cannot receive their share capital back whilst Company C Ltd is a going concern. The company cannot pay a dividend to shareholders because it has no profits available for the purpose (it has made a loss). The trading loss is borne by the shareholders as, after B has been paid £1,000, only £500 remains of their £1,000 share capital. Their shares are worth only £500, or 50 pence each. Unlike in Example 1, the creditor has been protected from the trading losses of the company by the share capital and will be protected until the net assets of the company are zero.
Example 3: Shares issued at a premium
If a company issues shares at an issue price above the nominal value of the shares, the amount by which the issue price exceeds the nominal value is the premium. The issue of £1 ordinary shares at an issue price of £2 is an example. The amount of the premium is not reflected in the share capital but in the share premium account, and the premium account balance appears in the balance sheet. With two exceptions, the premium account amount is subject to the same maintenance rules as the share capital. It is an ‘undistributable reserve’. It cannot be returned to shareholders (except as authorised by, and subject to compliance with procedures in, the 2006 Act) and it does not count as profits for the purposes of distribution.
If the £1 ordinary shares of Company C Ltd in Example 2 above had been issued at the issue price of £2, the balance sheet of Company C Ltd would have looked like this:
Cash at bank
Sum owed to B
1,000 (number of issued shares × nominal value)
1,000 (premium paid on issue of shares)
Neither the share capital nor the share premium account balance may be distributed to shareholders: the creditors will be protected by the amount of the share premium as well as the share capital.
In Trevor v Whitworth (1887) 12 App Cas 409 (HL), Lord Watson explained the creditor-protection rationale for the existence of capital maintenance rules:
‘[P]ersons who deal with, and give credit to a limited company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid, as well as upon the responsibility of its members for the capital remaining at call; and they are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business.’
8.1.2 The relevance of share capital over the life of a company
The examples in section 8.1.1 demonstrate how share capital can protect a creditor from losing money due to a company experiencing trading losses. They are based on a single, financial creditor lending money to a company at the outset of its operations and cover only the first year of the company’s life. In such a simple, somewhat unrealistic, scenario share capital is observed to represent a cushion for creditors against the risk of default of the company. In reality, a financial creditor will seek to secure any sum lent to the company. Taking security offers far greater protection to a creditor than the initial share capital contributed to a company (secured debt is explained at section 6.4.6 and in Chapter 16).
In reality, the ability of the share capital to protect creditors and the importance of share capital to creditors reduces over the life of a company. First, the initial share capital becomes an increasingly historic figure, eroded in real terms by inflation. Second, creditors who extend credit to a company with a trading record will have more information about the company available to them than the limited information available on formation. The relevance of share capital to creditors is picked up again below, at section 8.4, after we have reviewed the rules designed to prevent it being returned to shareholders.
8.1.3 The meaning of ‘capital maintenance’
Capital maintenance is referred to as a ‘principle’, ‘doctrine’ or ‘core concept’ of company law. It is not a straightforward concept and its precise scope is unclear. It is necessary to break the concept down into its components.
Lord Russell identified the two key components of capital maintenance (when a company is not being wound up) in Hill v Permanent Trustee Company of New South Wales  AC 720 (PC):
‘A limited company not in liquidation can make no payment by way of return of capital to its shareholders except as a step in an authorised reduction of capital. Any other payment made by it by means of which it parts with moneys to its shareholders must and can only be made by way of dividing profits. Whether the payment is called “dividend” or “bonus”, or any other name, it still must remain a payment on division of profits.’
The two fundamental legal principles identified in Lord Russell’s judgment can now be found in the Companies Act 2006:
a limited company having a share capital may not reduce its share capital except as authorised by statute (s 617);
distributions of a company’s assets to its members, whether in cash or otherwise, may only be made out of profits available for the purpose (s 830 and see also s 831 in relation to public companies).
To appreciate the operation and role played by capital maintenance in company law, it is important also to be aware of legal rules supporting and refining these key principles. Accordingly, the capital maintenance concept can be regarded as shorthand for:
minimum share capital rules (ss 763–767);
the basic prohibition on a company reducing its share capital (s 617);
detailed exceptions to the prohibition on a company reducing its share capital (Pts 17 and 18 of the 2006 Act);
the requirement that distributions to shareholders may only be paid out of profits available for the purpose (ss 829–853);
the shareholder last principle on winding up (Insolvency Act 1986 ss 107 and 143(1); Ayerst (Inspector of Taxes) v C & K (Construction) Ltd  AC 167).
Each of these components of capital maintenance is considered in turn in the following sections of this chapter.
8.2 Minimum share capital requirement
8.2.1 Requirement to have a share capital
Public companies and private companies limited by shares must have a share capital. Incorporators are required to register a statement of capital and initial shareholdings on registration indicating the number of shares to be taken on formation by the subscribers and their nominal value (s 10).
The share capital of a private company can be as small as the incorporators choose, for example, one share of one penny.
Public companies must have allotted shares of no less than the authorised minimum as a condition of the registrar of companies issuing a trading certificate and a public company must not do business without having a trading certificate (s 761). The authorised minimum nominal value of the issued shares of a public company is £50,000 or the prescribed euro equivalent (ss 761(2) and 763).
Public companies may not issue shares unless they are paid up as to at least one-quarter nominal value (s 586) and shares issued at the time of incorporation must be paid for in cash (s 584). The result is that a company registered as a public company must have at least £12,500 in cash when it commences business and the right to call for at least a further £37,500 from shareholders. Laws governing payment for shares, considered in section 7.5.1, are important to ensure that the company is entitled to receive from a shareholder at least the nominal value of his shares: shares may not be issued at a discount (s 580).
The importance to creditors of the requirement that a company has a share capital and the minimum required for public companies are considered in section 8.4.
8.3 Statutory prohibition on reduction of share capital except in accordance with the Act and company articles
Once a company has been registered with its initial share capital, the company may not alter its share capital except in the ways set out in s 617. Section 617 permits reduction of share capital in accordance with ss 641–657. There is no need for specific authorisation in a company’s articles to reduce its share capital in accordance with the Act. If, however, articles contain any restriction or prohibition on reduction of share capital, the provisions in the articles must be complied with (s 641(6)).
8.3.1 Private company reduction of share capital
A private company may reduce its share capital by either of two procedures. It may use the old procedure (the only procedure available to a public company to reduce its share capital), which requires confirmation by court order and is considered in the next subsection. Alternatively, it can use the new procedure, first introduced by the Companies Act 2006 and contained in ss 641–644. This procedure is part of the deregulation of company law for private companies as the old rules were regarded as unnecessarily complicated. No court confirmation of the reduction is required and the fact that the procedure has been introduced essentially acknowledges that maintaining share capital is not important to the creditors of private companies. The critical basis for a reduction is the opinion of the directors that the company is solvent and will remain solvent for the following year.
The solvency statement process
A private company may reduce its share capital by the following process (ss 641(1)(a) and 642–644):
1. Directors conduct a review of the company’s solvency.
2. Every director signs a solvency statement.
3. Directors send a proposed special resolution to members (with a copy of the solvency statement if the resolution is to be a written resolution).
4. Shareholders pass a special resolution (which can be passed at a meeting or a written resolution) within 15 days of the date of the solvency statement.
5. The following must be registered with the registrar (s 644):
copy of solvency statement;
statement of capital as reduced;
confirmatory statement regarding compliance with the reduction of capital process.
The reduction does not take effect until the required documents and statements have been registered.
The solvency statement (s 643)
The solvency statement needed to support a share capital reduction is a prescribed-form statement, s 643(3). It must be signed by all directors. Each director must confirm that he has formed the opinion that:
on the date of the statement there is no ground on which the company could be found to be unable to pay (or otherwise discharge) its debts; and
the company will be able to pay (or otherwise discharge) its debts as they fall due during the year immediately following the date of the statement.
If the directors make a solvency statement without having reasonable grounds for the opinion expressed in it, which is then delivered to the registrar, every director who is in default commits a criminal offence and is liable for imprisonment of up to 12 months or a fine or both (ss 643(4) and (5)).
Right of shareholders and creditors to object
In contrast with a reduction of capital by confirmation of the court (ss 645 and 646), neither creditors nor those shareholders who do not support the reduction of share capital have an opportunity during the process to object to a reduction of capital effected by the solvency statement route. Note, however, the need to ensure that if there is a variation of class rights, the variation of class rights procedure is gone through (see Chapter 7.3.2). Also note that if the directors have breached their duties in the course of the reduction, minority shareholders who object may be able to bring a derivative claim, and, furthermore, the circumstances may found a successful unfair prejudice petition. Each of these procedures are examined in Chapter 14.
8.3.2 Public company reduction of share capital
A public company (and a private company, although it seems unlikely that a private company will use this more cumbersome procedure in future) may reduce its share capital by special resolution but must secure a confirmation order from the court (ss 641(1)(b) and 645–651).
1. A special resolution must be passed.
2. The company must settle a list of creditors for the court and either:
obtain the consent of all creditors; or
pay off, or set aside a sum to pay off, any creditor who does not consent.
3. The company must present a petition to the court to confirm the reduction.
4. The court may make an order confirming the reduction ‘on such terms and conditions as it thinks fit’ (s 648(1)).
5. The following must be registered with the registrar (s 649):
copy of the court order;
statement of capital as reduced, approved by the court.
The reduction does not take effect until the required documents and statements have been registered.
When the court is considering a petition to reduce share capital it must consider the interests of the creditors, the shareholders and members of the public who may invest or become creditors of the company (Ex parte Westburn Sugar Refineries Ltd  AC 625). In relation to creditors, the court must not confirm the reduction unless it is satisfied in relation to every creditor who has not consented to the reduction that either his debt has been paid off or a sum has been set aside by the company to pay him off (s 648(2)). An offence is committed, punishable by fine, by every officer of the company who intentionally or recklessly conceals the name of a creditor or misrepresents the nature or amount of a creditor’s debt or claim (s 647). Section 646 of the Act, which entitles a creditor to object to the reduction, has been amended to require that to succeed, the creditor must demonstrate that its claim is at risk and that the company has not provided adequate safeguards (a mandatory requirement arising from European Directive 2006/68, implemented by the Companies (Share Capital and Acquisition by Company of Its Own Shares) Regulations 2009 (SI 2009/2022)).
In relation to shareholders, the court must consider whether or not the reduction is fair and equitable as between shareholders, whether of the same or different classes (see Scottish Insurance Corporation Ltd v Wilsons & Clyde Coal Co Ltd  AC 462 (HL)). Note that where the reduction involves a particular class of shareholders, the variation of rights procedure may have to be gone through (see section 7.3.2 and the cases considered there).
8.3.3 Acquisition of own shares
Section 617 expressly states that the statutory prohibition on a company reducing its share capital does not affect the power of a company to acquire its own shares in accordance with Pt 18 of the Act. This is supported in Pt 18 by s 658 which prohibits the acquisition by a company of its own shares, ‘except in accordance with the provisions of this Part’. Pt 18 contains provisions permitting a company to acquire its own shares either by purchasing them or redeeming redeemable shares. The rules for private companies are more relaxed than the rules for public companies.
The acquisition of own shares rules were considered by an independent review conducted for BIS in 2012 in the context of encouraging employee share ownership. The rules were found by the Nuttall review of employee ownership (BIS/12/933) to be overly burdensome and therefore a disincentive to direct employee ownership. Following this review, Pt 18 has been materially amended by the Companies Act 2006 (Amendment of Part 18) Regulations 2013 (SI 2013/999) to make it simpler for companies (both private and public) to purchase their own shares for the purposes of or pursuant to an employees’ share scheme. Whilst the principal aim of the 2013 reform was to remove disincentives to employees’ share schemes and, in particular, to facilitate share buy backs from employees leaving the company, a new power has been introduced permitting private companies to acquire its own shares for cash up to the lower of £15,000 or 5 per cent of the value of its share capital in any year and this new power is not limited to the purchase of shares for or pursuant to an employees’ share scheme.
The statutory power of a public company to acquire its own shares is basically restricted to acquisition using distributable profits or the proceeds of a new issue of shares made for the purpose (ss 687(2) (redemption) and 692(2) (purchase)). The 2013 Regulations do not permit a public company to make share acquisitions out of capital or cash. Their relevance to public companies is that they introduce a process whereby any company, public or private, may pass an ordinary resolution authorising the company for up to five years to make off-market purchases of its shares for the purposes of or pursuant to an employees’ share scheme (s 693A). This new process makes it procedurally simpler for a public company to acquire its own shares for the purposes of or pursuant to an employees’ share scheme.
Acquisition of own shares out of the proceeds of a new issue of shares
Where shares are bought by a public company out of the proceeds of a new issue of shares, the acquired shares are either held as treasury shares or cancelled. If the acquired shares are cancelled, the share capital is reduced (ss 688 and 706), but new shares have been issued which increase the share capital by at least the amount of the reduction. The overall effect is that there is no reduction in share capital. For this reason, such acquisitions are not considered further in this chapter.
Acquisition of own shares using distributable profits
In relation to the acquisition by a public company of its own shares using distributable profits, again no effective reduction of share capital occurs as a result of the operation of s 733. Where shares are bought by a company using distributable profits, the acquired shares are held as treasury shares or cancelled. If the acquired shares are cancelled, the share capital is reduced (ss 688 and 706), but s 733 requires a sum equal to the nominal value of the shares acquired (the reduction in capital), to be transferred to an account called the ‘capital redemption reserve’. Section 733(6) provides that, with one exception, the provisions of the Act relating to the reduction of share capital apply to the capital redemption reserve. Consequently, the capital redemption reserve is treated like share capital and may not be distributed. If the share capital account and the capital redemption reserve account are added together they equal the share capital amount before the acquisition of the shares. This means that the company’s share capital is technically reduced but in practical terms the company must be operated as if its share capital remained the same as before the reduction.
The exception to treating the capital redemption reserve in the same way as share capital is that the capital redemption reserve can be used to pay up new shares issued to existing shareholders as fully paid bonus shares. The result of such an issue is to turn the amount used from the capital redemption reserve to fund the bonus share issue back into share capital. That being the case, the exception is consistent with the acquisition of shares using distributable profits being in practical effect not a reduction of share capital at all. For this reason, such an acquisition is not considered further in this chapter.
A public company seeking to acquire shares out of capital must use the reduction of capital procedure considered at section 8.3.2 for which court confirmation is required.
A private company is permitted to acquire its own shares (ss 684 and 690):
using distributable profits or the proceeds of a new issue of shares made for the purpose (in accordance with Chapters 3 and 4 of Pt 18) (ss 687(2) (redemption) and 692(2) (purchase));
‘with cash’ up to a limit of the lower of £15,000 or 5 per cent of the value of its share capital in accordance with Chapter 4 (s 692(1)(b) (purchase only, not redemption)); and
out of capital (in accordance with Chapter 5 of Pt 18) (ss 687(1) (redemption) and 692(1)(a) (purchase)).
When a company purchases its own shares with distributable profits or cash, the shares may be held as treasury shares (s 724(1)) or cancelled. If cancelled, a sum equal to the reduction in share capital must be transferred to the capital redemption reserve and, as explained above, the capital redemption reserve is treated like capital and cannot be distributed. In other cases, the shares must be cancelled. If shares that have been acquired using capital are cancelled, a real reduction in share capital occurs.
Is the acquisition of shares using capital provisions in Chapter 5 of Pt 18 redundant?
The procedure in Chapter 5 of Pt 18 of the Act (ss 709–723), by which a private company may use capital to acquire its own shares, existed, albeit in a slightly different form, before the 2006 Act. It is more onerous than the solvency statement procedure introduced by the Companies Act 2006 by which a private company may reduce its share capital but remains an important procedure. One reason for a company to go through the more onerous ss 709–723 procedure is to allow the company to pay a premium out of capital on a purchase of its own shares.
Acquisition of shares using capital (not for an employees’ share scheme)
If a private company intends to redeem (s 687) or purchase (s 690) its own shares using capital, the shares must be fully paid-up and paid for on acquisition (although on a redemption of shares, payment may be deferred if the terms of redemption so provide and this requirement does not apply to shares purchased for the purposes of or pursuant to an employees’ share scheme) (ss 686 and 691). In addition to ss 709–723 (the provisions specifically relevant to the use of capital to pay for a share acquisition), redeemable shares will be redeemed in accordance with their terms of redemption, and non-redeemable shares must be purchased in accordance with the ‘off-market’ purchase procedure set out in the Act (ss 693–700 and 702–708). Note that before any capital may be used, all profits available for distribution and the proceeds of any fresh issue of shares must be applied to pay for an acquisition or redemption (s 710).
Briefly, unless the shares are purchased for the purposes of or pursuant to an employees’ share scheme (on which, see below), the requirements for a share purchase using capital are as follows:
Directors must enquire into the affairs and prospects of the company (s 714).
A purchase or buyback contract must be negotiated with the shareholder selling the shares and must be available for inspection (s 702).
A directors’ statement must be drafted and signed by all directors, including:
the amount of the capital payment permissible;
a solvency statement as in s 643 (see section 8.3.1) (s 714).
An auditor’s report must be obtained and annexed to the directors’ statement (s 714(6)) stating that:
the amount of the permissible capital payment is in his view properly determined; and
he is not aware of anything to indicate that the opinion expressed by the directors in their statement is unreasonable in the circumstances.
The directors’ statement and auditor’s report must be available for inspection (s 720).
Public notice of any proposed payment out of capital is required, both in the Gazette and in an appropriate national newspaper (s 719(1) and (2)).
The terms of the purchase or buyback contract (s 696) and the directors’ statement and auditor’s report (s 718) must be made available to shareholders at the meeting at which the relevant resolution is to be passed or must be sent to shareholders with the written resolution.
A special resolution must be passed authorising payment out of capital (s 716).
An ordinary resolution must be passed authorising the terms of the purchase or buyback contract (s 694).
The purchase or buyback contract must be executed.
The purchased shares are treated as cancelled (s 706).
The following must be sent to the registrar:
copies of the directors’ statement and auditor’s report (s 719(4));
notice of purchase of shares (s 707);
notice of cancellation and a statement of capital (s 708);
a copy of the special resolution authorising payment out of capital (s 30).
The directors’ statement must be in prescribed form containing the prescribed information and paragraph 5 of the Companies (Shares and Share Capital) Order 2009 (SI No 2009/388) states that it must be signed by all directors.
Creditors and any shareholder who has not consented have five weeks from the date of the special resolution authorising the payment of capital within which to object to the use of the capital to redeem or acquire the company’s shares. The objection is made by application to the court to cancel the special resolution (s 721).
Acquisition of shares using capital for an employees’ share scheme
If shares are being acquired by a private company using capital for the purposes of or pursuant to an employees’ share scheme, the process outlined in the previous section may be simplified in two respects as a result of the changes introduced by the Companies Act 2006 (Amendment of Part 18) Regulations 2013 (SI 2013/999). First, a s 693A resolution may already be in place authorising the purchase of shares for the purposes of or pursuant to an employees’ share scheme and, second, ss 720A and B may be relied on which remove the need for a directors’ statement, auditor’s report and public notice, substituting a process (similar to that for a reduction in share capital pursuant to s 641(1) (a)), simply requiring a directors’ solvency statement and a special resolution.
8.4 Is capital maintenance important to creditors?
Focusing on share capital, private companies must have a share capital but it may be wholly minimal, such as, in theory, one share of one penny. Although public companies are required to have a minimum share capital of £50,000, this is not a substantial sum of money for a company in business in today’s world.
In practice, of the approximately 480,000 companies first registered in 2013–14, close to 98 per cent had issued share capital of under £10,000. Of all companies on the register at the beginning of 2014, 78 per cent had issued share capital of £100 or less and 93 per cent had issued share capital under £10,000.
The rules and facts above indicate that in relation to most companies share capital offers little comfort to creditors that the company will be able to pay its debts. Evidence received by the Company Law Review Steering Group suggests creditors do not regard a company’s share capital as particularly important.
‘The view of the substantial majority of consultees … was that a company’s share capital is nowadays relatively unimportant as a measure of its ability to repay credit, and that other measures, including net assets, cash flow and interest cover are considerably more important.’
Company Law Reform, ‘Modern Company Law for a Competitive Economy: Company Formation and Capital Maintenance’, consultation document (October 1999) at para 3.5