For nearly 100 years, from the introduction of limited liability companies, it was illegal to reduce the share capital of such a company without a court order. That remains the primary position in the Companies Act 2006 unless one of the ways specified in that Act is adopted and the company complies with the requirements for the relevant reduction of capital.

The traditional way that capital could be reduced (in a private company) was by way of a purchase of own shares out of the company’s capital. This involved a complex procedure, including advertising the proposed transaction in the London Gazette and by notice to all creditors or advertising in a National Newspaper.

In order to carry out a purchase of shares out of capital, all distributable profits of the company had first to be used in the purchase of own shares and there had to be a delay in making the payment to allow the creditors of the company to apply to the court to prevent it being made. This is cumbersome.

Since 2008, it is possible for a private limited company to reduce its share capital in a number of ways without involving advertising or the courts. There are procedural requirements including a members’ special resolution and a solvency statement from the directors (which we would recommend is supported by advice from your accountants, but this is not a requirement), but using this procedure it is possible to reduce capital, for example, by moving share premium account into distributable reserves or by reducing the amount paid up on existing shares (turning £1.00 shares into £0.50 shares, perhaps).

The amount of capital reduction becomes distributable reserves, so this is potentially a quicker way of doing a share buyback where there are insufficient distributable reserves to allow the buyback to proceed without using capital.

There are more recent regulations that allow small purchases of own shares out of capital without complying with the full procedure mentioned above and whether or not there are distributable reserves available for the purpose.

This de minimis exemption applies to purchases of shares representing the lower of

1. £15000 or
2. five percent of the company’s nominal paid-up share capital at the beginning of the financial year.

For private companies, this will usually mean (2), as to reach £15000 the nominal share capital would need to be £300,000 which is unusually high for a private company. “Nominal share capital” is the face value of your company shares (often £1 per share) multiplied by the number of shares in issue (often 100) and does not take account of any premium paid on the issue of shares which is sometimes thousands of pounds per share.

The above addresses some headline issues and should not be relied upon as a comprehensive guide to the law in this area.