There are a number of reasons why a company may wish to carry out a reduction of capital.

Before the introduction of the Companies Act 2006, the only way a private company could effect a reduction was by way of a court order. Today, the way a company may go about a reduction of capital depends on its legal formation. Private companies no longer need a court order, making things quicker, easier and less expensive.

What’s the reason for wanting to carry out a reduction of capital?

There are a number of reasons why a company might want to reduce its share capital:

• Reduce liability: the most common reason is to reduce the number of shares to a more manageable level, i.e. to reduce liability.
• To eliminate losses: as a company can only pay a dividend from surplus profits, eliminating accumulated losses which would otherwise prevent these payments is sometimes desirable.
• To return surplus capital: if a company has a surplus of cash or assets, these may be paid directly to shareholders by cancelling the shares issued to them.
• To support share buy-back or redemption: if a company wants to buy back or redeem shares out of its distributable profits, it may carry out a reduction of capital in order to create enough distributable profits to do so.