Using the solvency statement procedure to create reserves

This article is taken from the fourth postcard in our series of cards on group reorganisations, and looks at using the solvency statement procedure to create reserves.

Links to the other postcards in the series can be found at the end of this article.

The ‘solvency statement procedure’ is a straightforward way for private companies to create distributable reserves by reducing share capital, share premium or capital redemption reserve. The new reserves can then be used to return assets or cash to shareholders, or may simply remove a dividend block which previously existed.

The procedure can be carried out on a single day if necessary. There is no need to advertise for creditors, and no period during which creditors can object (unlike the procedure for buy-back of shares out of capital). All the directors must sign a statement of solvency, which is very similar to the one required for a members’ voluntary liquidation. So it may not be appropriate if there is uncertainty about what creditors exist or what value should be attributed to creditors.

Where a company only has one shareholder and wants to reduce share capital (as opposed to share premium or the capital redemption reserve), the usual route would be to cancel the shares which are no longer required.

Other options will be appropriate in different circumstances. For example, if the company has more than one shareholder, then the preferred route is usually to reduce the nominal value of all the relevant shares, so that the proportionate entitlement of the shareholders is maintained.

If the company also has more than one class of shares, then the position can be more complicated, and the specific rights attaching to the shares will need to be checked.

Read the other postcards in this series:

Issue 1: Does the plan work for everyone?

Issue 2: What's it worth to you?

Issue 3: How should we balance risk against cost?

Issue 4: Can we release our assets?

Issue 5: Are people getting something for nothing?