A reduction of capital occurs where a company reduces the amount of its share capital. A company may reduce its share capital in a variety of ways, for example, it can extinguish or reduce the liability on any of its shares in respect of share capital not paid up, cancel any paid-up share capital that is lost or not represented by available assets (known as a loss reduction) or repay any paid-up share capital in excess of the company’s wants.
A company can reduce its share capital by reducing the number of shares in issue, the nominal value of shares in issue or the amount paid up on the shares in issue.
A company may want to reduce its share capital for various reasons, including to create distributable reserves to pay a dividend or to buy back or redeem its own shares; to reduce or eliminate accumulated realised losses in order to be able to make distributions in the future; to return surplus capital to shareholders; or to distribute non-cash assets to shareholders (usually in the context of a demerger).
A private company can reduce its share capital by a special resolution of its shareholders supported by court approval or a solvency statement signed by all of the directors.