Companies Act 2006 – Section 635

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Section 635: Copy of court order to be forwarded to the registrar

943. Section 635 sets out the procedural requirements as to notice where the court has
made an order on an application under section 633 or 634. Where the court has made an order
on application under these sections, the company must forward a copy of that order to the
registrar within 15 days of the date on which the order is made. Where a company fails to
comply with the provisions of this section, the company, and every officer of the company
who is in default, commits an offence (see subsections (2) and (3)).

Section 636 to 640: Matters to be notified to the registrar

944. These sections replace various provisions in sections 128 and 129 of the 1985 Act
which are concerned with notification to the registrar of the creation of, and variations to,
rights attached to a class of a company’s shares (section 128 of the 1985 Act) or class rights
of members (section 129 of that Act).

945. Under the Act, where a limited company creates a new class of shares, it will be
required to provide details of the rights attached to the shares in the return of allotment and
statement of capital required under section 555. There is a similar requirement in section 556
where an unlimited company allots a new class of share. Those provisions replace section
128(1) and (2) of the 1985 Act.

946. In addition, where a company varies the rights attached to any of its shares (or assigns
a name or other designation, or a new name or other designation to any class or description of
its shares) it will in future be required to register particulars of the rights affected under
section 637 (or 636) irrespective of how the variation in rights was achieved. Currently
companies are not required to provide this information if the rights attached to a particular
share or class of shares are varied by an amendment to the company’s memorandum or
articles or by special resolution or agreement of the company’s members which is required to
be filed under section 380 of the 1985 Act. Sections 638 to 640 make similar changes to the
disclosure requirements which apply to companies limited by guarantee not having a share
capital and unlimited companies not having a share capital which may, nevertheless, have
different classes of members.

947. It should be noted, that, in contrast to other alterations to a company’s share capital,
there is no requirement in section 637 for a statement of capital (see note on section 619).
Such a requirement would be superfluous, as a variation of class rights will not result in a
change to the aggregate amount of a company’s subscribed capital.

CHAPTER 10: REDUCTION OF SHARE CAPITAL

948. Section 135 of the 1985 Act lays down a statutory procedure under which a limited
company may, if authorised by its articles, reduce its share capital. This requires a special
resolution of the company’s members and the reduction must be confirmed by the court.
Companies limited by shares may also reduce their share capital under section 171 (private
company redemption or purchase of own shares out of capital) and sections 146 to 147 of the
1985 Act (which require a public company which acquires shares in any of the specified
ways, for example, through forfeiture for failure to pay up, to cancel those shares within a
specified period), the provisions of both of which are carried forward by the Act. A reduction
of capital may also occur as a result of the court making an order for the purchase by a
company of its members’ shares.

949. A company may wish to reduce its share capital for a variety of reasons, for example,
where its capital is in excess of the company’s wants or where the value of the company’s net
assets has fallen below the amount of its capital (as stated in the company’s accounts) and the
position is likely to be permanent.

Section 641: Circumstances in which a company may reduce its share capital

950. This section replaces section 135(1) and (2) of the 1985 Act. It sets out the
circumstances and manner in which a company limited by shares may reduce its share
capital. As recommended by the CLR (Final Report, paragraph 10.6), in future a private
company limited by shares will be able to reduce its share capital using a new solvency
statement procedure for capital reductions (see section 642).

951. A company may only reduce its share capital under section 135 of the 1985 Act if it is
authorised to do so by its articles. In line with the recommendations of the CLR (Completing
the Structure, paragraph 2.15), the requirement for prior authorisation in the articles has not
been retained but, if it wishes, a company may restrict or prohibit a reduction of capital by
making provision to this effect in its articles (see subsection (6)).

952. Subsection (1)(a) contains a signpost to a new provision, which will enable a private
company limited by shares to reduce its share capital using the new solvency statement
procedure (see above). In addition, private companies and public companies alike will
continue to be able to use the current court approved procedure for capital reductions – which
is retained in subsection (1)(b).

953. In the case of a private company limited by shares which is proposing to use the new
solvency statement procedure to effect a reduction of capital, the company may only reduce
its share capital under subsection (1)(a) if it will have at least one member remaining after the
proposed reduction (see subsection (2)). That member need only hold one share in the
company but that share must not be a redeemable share. The principle behind this
requirement is that a private company limited by shares should not be capable of reducing its
share capital to zero unless the reduction of capital is sanctioned by the court. This mirrors
the existing equivalent provision in section 162(3) of the 1985 Act – which applies to a
purchase of own shares.

954. Both the solvency statement procedure for capital reductions and the court-approved
procedure require a special resolution of the company’s members. Under subsection (5) a
special resolution to reduce a company’s share capital may not provide for the proposed
reduction to take effect on a date later than the date on which the resolution to reduce capital
takes effect. Under the solvency statement procedure a resolution to reduce capital will take
effect when the documents referred to in section 644 have been registered by the registrar
(see section 644(4)). This would operate to prevent a company passing a resolution on, say,
1st January stating that the reduction is to take effect on 1st October. Under the court
approved procedure, the resolution will take effect on the registration of the court order and
statement of capital or, in the context of a reduction forming part of a compromise or
arrangement under Part 26, on delivery of those documents to the registrar (unless the court
orders otherwise) (see section 649).

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