Corporate Law Update: A New Simplified Method Available for Companies to Reduce Share Capital
22 September 2015
The Companies Act 2014 (the Act) has introduced a more time efficient and cost effective option for certain Irish incorporated companies seeking to reduce share capital. A company may wish to reduce its share capital to, for example, make a return of funds to its shareholders when it does not have sufficient distributable reserves available.
Under the old legislation, the only available option for achieving this otherwise prohibited activity was by way of an application to the High Court for an order sanctioning the reduction. That process could prove lengthy and expensive. The process involved a review of the effect that the proposed reduction in share capital would have on the creditors of the company. If the High Court was satisfied that the interests of creditors would not be prejudiced then it could approve the reduction.
That court process is still available under the Act. However, there is now an additional option available to companies whereby a reduction in share capital can be effected without High Court approval. The Act introduces the Summary Approval Procedure (SAP). This is a significant change for Irish incorporated LTD, DAC and CLG companies, with many practical benefits including a speedier, more simplified and less costly process.
The SAP to reduce share capital involves the following steps:
1. Declaration of the Directors – a majority of the directors must make a declaration, which amongst other information, must include that the directors have made a full inquiry into the affairs of the company. In doing so, they have formed an opinion that the company will be able to discharge its debts and other liabilities as they fall due for a period of 12 months after the capital reduction. The directors must also state in the declaration that they do not have actual or constructive notice that the company will incur any material, extraordinary, future liability within the 12 months following the making of the declaration. The Act does not require the declaration to be sworn before a notary public, commissioner for oaths, independent solicitor or other suitable person. It can now be signed by the directors in counterpart;
2. Auditors Report – the auditors of the company must provide a report which confirms that the statements made by the directors in their declaration are “not unreasonable”;
3. Special Resolution – the shareholders must pass a special resolution authorising the capital reduction; and
4. CRO Filing - a copy of the directors’ declaration must be filed in the CRO within 21 days from the date on which the capital reduction is commenced.
While the SAP provides a greater degree of flexibility for a company in reducing its share capital, there is an increased risk for the directors in choosing this method of approval. This is because there is no court involvement or confirmation. The responsibility falls on the directors to ensure that their declaration is correct as well as on the auditors confirming that it is “not unreasonable”.
If a company is wound up within 12 months' of the declaration being made, or if the company’s debts are not paid or provided for in full, it is presumed, until the contrary is shown, that no reasonable grounds existed to make the declaration. In those circumstances, a liquidator, creditor, contributory to the company or the Director of Corporate Enforcement can make an application to the High Court to bring a civil sanction against the directors involved. Each director can be declared personally liable without any limitation of liability for all of the debts or other liabilities of the company should the declaration have been made without having reasonable grounds. This option therefore involves additional exposure from a director’s perspective.
Despite the additional risks involved for directors, the SAP is a positive addition to the new legislation. The new streamlined procedure will greatly assist in providing companies with a more efficient option for reducing their share capital.
For more information, please contact a member of our Corporate team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.