Companies Act 2006 – Section 642

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Section 642: Reduction of capital supported by solvency statement

955. This section sets out the conditions that must be satisfied in order for a private
company limited by shares to reduce its share capital using the new solvency statement
procedure.

956. The procedural requirements that the directors must follow when they propose a
capital reduction using the solvency statement route are set out in subsections (1) to (3) which
provides that the solvency statement made in connection with a reduction of capital by a
private company cannot be made more than 15 days before the date on which the resolution
to reduce capital is passed. It also provides that both the resolution and the solvency
statement must be filed with the registrar in accordance with the provisions of section 644.

957. The solvency statement must also be made available to the company’s members when
they vote on the resolution to reduce capital and the procedure for providing a copy of the
solvency statement to the members varies according to whether the resolution to reduce
capital is proposed as a written resolution or at a meeting of the company’s members (see
subsections (2) and (3)). Whilst a failure to observe these procedural requirements will not
affect the validity of the resolution to reduce capital, if a solvency statement which has not
been provided to the company’s members in accordance with the provision of this section is
subsequently filed with the registrar, every officer of the company who is in default commits
an offence (see section 644).

Section 643: Solvency statement

958. A solvency statement made under section 643 must be made by all of the directors. If
one or more of the directors is unable or unwilling to make this statement, the company will
not be able to use the solvency statement procedure to effect a reduction of capital unless the
dissenting director or directors resign (in which case the solvency statement must be made by
all of the remaining directors).

959. The solvency statement must be in the “prescribed form” and “prescribed” in this
context means prescribed by the Secretary of State in regulations or by order made under the
Act.

960. The solvency statement must state the date on which it is made and the name of each
director of the company but there is no requirement that the directors must all be in the same
location when they make this statement. The registrar will be able to make rules under section
1068 as to the form of the solvency statement.

961. In forming their opinions, the directors must take account of all the company’s
liabilities including contingent and prospective liabilities (see subsection (2)). So, in
circumstances where a company holds redeemable preference shares which, for the purposes
of the accounting standards that applied to the company on the date that the directors made
the solvency statement, are treated as liabilities, a proposed redemption or purchase of these
shares in the relevant period should be treated as a contingent or prospective liability.

962. If the directors make a solvency statement without having reasonable grounds for the
opinions expressed in it, and that statement is subsequently delivered to the registrar, every
director who is in default commits an offence (see subsection (4)). The penalty for this
offence is set out in subsection (5).

Section 644: Registration of resolution and supporting documents

963. This section sets out the requirements as to delivery of the solvency statement and
other key documents to the registrar. The resolution to reduce capital itself must be filed with
the registrar within the same time period as currently applies – that is, within 15 days of the
date that it is passed (see section 30) and it will not take effect until the solvency statement
and statement of capital (see subsections (1) and (2)) are registered by the registrar. As with
all circumstances where the company makes an alteration to its subscribed capital, the
company is required to deliver a statement of capital to the registrar (see note on section 619).

964. In addition to making a solvency statement in accordance with section 643, the
directors must also make a statement confirming that the solvency statement was made not
more than 15 days before the date on which the resolution to reduce capital was passed and
that this statement was provided to the company’s members in accordance with section 642 –
see subsection (5).

965. In addition to the new offences which are set out in sections 643(4) (directors making
solvency statement without reasonable grounds for the opinion expressed in it) and
subsection (7) (company delivering solvency statement that was not provided to members to
registrar), where a company fails to comply with any of the filing requirements under section
644, an offence is committed by the company and every officer of the company who is in
default (see subsection (8)). The penalty for this offence is set out subsection (9).

Sections 645 to 649: Reduction of capital confirmed by the court

966. These sections replace or restate various provisions in the 1985 Act that are concerned
with reductions of capital confirmed by order of the court.

967. Sections 645 and 646 restate section 136 of the 1985 Act which is concerned with the
procedure for making an application to court to confirm a reduction of capital (including the
creditors’ right to object). If, on such an application, an officer of the company intentionally
or recklessly conceals a creditor or misrepresents the nature or amount of a debt owed by the
company, or is knowingly concerned in any such concealment or misrepresentation he
commits an offence (see section 647). As now the court may make an order confirming the
reduction of capital on such terms and conditions as it thinks fit (see section 648 which
restates section 137 of the 1985 Act).

968. Section 649 replaces section 138(1) to (4) of the 1985 Act. Under section 138 of that
Act, a resolution to reduce capital using the existing court approved scheme takes effect when
the court order confirming the reduction and minute of the reduction are registered by the
registrar. The minute (which must be approved by the court) sets out key information
regarding the company’s share capital immediately after the reduction. Section 649 updates
the 1985 Act provisions by replacing the current requirement for a minute of the reduction
with a statement of capital (see note on section 619). Like the minute confirming the
reduction, this statement must be approved by the court.

969. In line with the CLR’s recommendations (Final Report, paragraph 13.11), subsection
(3)(a)(i) of this section provides that a reduction of capital that forms part of a compromise or
arrangement under Part 26 of the Act will take effect at the same time as other aspects of that
compromise or arrangement: namely on delivery of the court order confirming the reduction
(and statement of capital approved by the court) to the registrar (unless the court orders that it
should take effect on the registration of these documents) (see new subsection (3)(a)(ii)).

970. In all other cases, that is, where the reduction of capital does not form part of a
compromise or scheme of arrangement under Part 26, where a company reduces its share
capital using the court approved procedure the reduction will, as now, take effect on
registration of the court order confirming the reduction (and statement of capital) by the
registrar. Subsection (5) requires the registrar to certify the registration of the order and
statement of capital. Subsection (6) restates section 138(4) of the 1985 Act in relation to such
certificate.

Section 651: Expedited procedure for re-registration as a private company

971. This section, together with section 650, substantially restates section 139 of the 1985
Act and provides for the consequences where the court confirms the reduction by a public
company of its share capital below the authorised minimum (defined in section 763): in
particular they facilitate the re-registration of the company as private.

972. Subsection (3) replaces section 139(4) of the 1985 Act. It introduces a requirement to
send a copy of the court’s order (that is, the order authorising the company to be so reregistered
without its having passed a special resolution) to the registrar, together with an
application for re-registration. The current requirement for the application to be signed by a
director (or secretary) has not been retained.

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