Why reduce company capital?

Companies reduce capital for a number of reasons including the repayment of funds to shareholders, extinguishing a liability on capital not paid up or to create distributable reserves in order to declare dividends. 

Procedures for Capital Reduction 

Under the old legislation a limited company could not reduce its share capital (including share premium) unless it had distributable profits (realised profits less realised losses) available to match the amount of the reduction or it received the sanction of the High Court.

Now, Part 3 of the Companies Act 2014 (the “Act”) allows for two methods - a company may reduce its capital by:

  • Summary Approval Procedure (“SAP”); or
  • Passing a shareholders’ special resolution which is confirmed by the High Court.

The Summary Approval Procedure method

The following are the steps under the SAP:

  1. shareholders’ special resolution authorises the reduction; 
  2. A majority of the directors make a declaration of solvency to confirm that they have made a full enquiry into the affairs of the company and have formed the view that the company will be able to pay its debts and other liabilities in full as they fall due during the period of 12 months after the date of the reduction;
  3. The auditor or someone qualified to be the auditor prepares an independent report. The report should state that the declaration of solvency is not unreasonable; and
  4. The company is required to file the declaration of solvency, independent report and special resolution in the CRO not later than 21 days after the capital reduction.

A reduction approved by SAP takes effect on the date specified in the shareholders’ resolution or if no date is specified on the expiration of 12 months following the date of passing the resolution.

The Court Approved Capital Reduction method

The following are the steps to have the capital reduction confirmed by the Court:

  1. Pass a shareholders’ special resolution approving the reduction in capital
  2. Advertise a notice of the passing of the resolution in at least one daily newspaper local to its registered office
  3. Notify any creditors outside of the State by ordinary post of the passing of the resolution

The court application itself is commenced by filing a notice of motion together with an affidavit grounding the application.  There are two court appearances:

  • First hearing: This hearing seeks direction from the Court, usually with regard to notifying the company creditors, placing additional advertisements etc.  
  • Second hearing: This will be a full hearing of the matter including an outline of how the Court’s directions given at the first appearance have been complied with.  Provided the court is happy that everything is in order, it may at this hearing make an Orderconfirming the capital reduction.  The Order and the court approved minute (showing the alterations in the company capital) must be filed in the CRO.

Which route should companies take?

The SAP allows for a much simpler procedure for reducing share capital in a company and is to be welcomed, but it does place more responsibility on directors. The Act provides that if a company is wound up within 12 months of the date of the declaration of solvency and its debts are not paid or provided for in full within a period of 12 months, there is a rebuttable presumption that the directors did not have reasonable grounds for the making of the declaration of solvency. If this is the case a director may be held personally liable, without limitation of liability, for the debts and other liabilities of the company.  As a result there is still room for the court approved route, especially where large sums are involved and directors are reluctant to make the declaration required for the SAP.