The Bill provides that an unlimited company can reduce its share capital by the passing of a special resolution.  This is already the case under the existing Companies Acts and is one of the advantages of unlimited companies as they can freely reduce their issued share capital without court approval.

The Bill now provides that no restrictions (being those contained in Chapter 7 of Part 3 of the Bill dealing with distributions) shall apply in relation to the making of distributions out of the assets of an unlimited company.  The Bill by doing so seeks to correct a current legislative difficulty as regards the applicability of part of the capital maintenance rules comprised in the Companies (Amendment) Act 1983 (the "1983 Act") to unlimited companies.

Section 51 (2) of the 1983 Act defines distribution as "every description of distribution of a company's assets to members of the company, whether in cash or otherwise, except distributions made by way of…(c) the reduction of share capital by extinguishing or reducing the liability of any of the members on any of its shares in respect of share capital not paid up or by paying off paid up share capital".

It is arguable that the repayment of the premium paid on shares when issued falls within the definition of share capital under S 62 of the Companies Act 1963 for the purposes of share capital reductions and, therefore, can be paid back without the need for matching reserves.  However, if the redemption of shares in an unlimited liability company involves a redemption at a premium above the price paid for the shares including the initial premium paid, this would certainly involve making a distribution to a member for the purposes of Sections 45 and 51 of the 1983 Act and can only therefore be made out of profits available for distribution by reason of the provisions of Section 45 (1) of the 1983 Act.

The Bill by disapplying such capital maintenance rules on distributions by unlimited companies helpfully removes this problem so that even if shares in an unlimited company are to be cancelled at a premium, an unlimited company can do so without the need to have reserves.