How to Reduce the Share Capital of Your Singapore Company
Share capital refers to the amount shareholders invest in a company for it to carry out its operations. Share capital may be altered or increased, subject to certain conditions.
Hence, this article will provide a guide on the steps to take to reduce your company’s share capital.
What It Means to Reduce Your Company’s Share Capital
There are 2 types of share capital that can be reduced:
- Paid-up share capital; and
- Unpaid share capital.
Paid-up share capital consists of shares which value has been fully paid for by the shareholder.
Unpaid share capital consists of shares which value have been partly paid, or not paid at all. The shareholder retains the liability to pay the unpaid value at a later date.
There are many ways to reduce your company’s share capital. 3 of these are mentioned in the Companies Act:
- Extinguishing or reducing a member’s liability to pay the amount of unpaid capital on his shares;
- Cancelling any paid-up capital which is lost or unrepresented by assets;
- Returning to shareholders any paid-up capital which is in excess of the needs of the company
The following actions also amount to a reduction of share capital, although these are not expressly mentioned in the Companies Act as being methods of reducing share capital:
- Selling the company’s capital assets and dividing the proceeds among members;
- Surrender of shares to the company;
- Refunding monies subscribed for shares to shareholders; or
- Any other method of reduction
Why Might You Want to Reduce Your Company’s Share Capital?
There are multiple reasons why a company might want to reduce its share capital:
- A company may simply wish to return surplus capital to shareholders which it no longer requires.
- A company which does not have distributable profits may be keen to reduce its capital if it cannot afford to pay any future dividends.
- A company may also conduct a capital reduction in order to reorganise, simplify and improve its capital structure. Changing a company’s capital structure may allow a company to engage in greater debt financing, which in turn increases leverage and potentially the company’s growth rate.
- Reducing share capital helps ensure the sufficiency of distributable funds to maintain sustainable dividend payments. This is because where there are less shares, less dividends are expected to be declared.
How Can You Reduce Your Company’s Share Capital?
Presently, there are 2 ways to obtain approval to reduce share capital:
- The court-approved method; and
- Non-court approved method
Under both methods, the Accounting and Corporate Regulatory Authority (ACRA) does not require any fees to be paid for the entire process.
1. Reducing capital with the approval of the court
For a successful court-approved capital reduction, the following actions are required:
- A special resolution for the reduction must be passed; and
- The reduction must be confirmed by the court
The company must send ACRA a notice stating that the special resolution has been passed. Before the court approves the resolution, it must be satisfied that each qualifying creditor has either consented to the reduction or assured the court that his debt is secured or safeguarded.
This is because where a company proposes to reduce its share capital, the court must ensure that its creditors are not adversely affected by such reduction.
A qualifying creditor is a creditor whose debt or claim would be admissible in proof, if the company were to hypothetically commence winding up on a certain date fixed by the court.
Once the court has approved the reduction, the company, must lodge with ACRA via the BizFile+ website a copy of the approving court order and a notice containing the reduction information within 90 days of the approval.
On BizFile+, the company is then permitted to edit its shareholdings according to the approved capital reduction. The capital reduction will be effective only when ACRA records the information lodged with it.
2. Reducing capital without the approval of the court
For a successful non-court approved capital reduction, the following steps need to be carried out:
- A shareholders’ special resolution must be passed;
- The board of directors makes a solvency statement (if required to do so); and
- The company must comply with the publicity requirements (more below)
The solvency statement verifies that the company is presently able to repay its debts in the next 12 months, even if it commences winding up, and that the value of its assets is not less than the value of its liabilities.
The directors must exercise due diligence and properly consider the company’s financial position when preparing the solvency statement. Any director who provides a solvency statement without having adequate justification for the statements expressed in it may be subject to criminal liability.
The solvency statement can be made 20 days before the date of passing of the special resolution (for reducing share capital) at the earliest.
However, a solvency statement is not required where the reduction of share capital does not involve a reduction or distribution of assets by the company, or a release of any liability owed to the company.
The special resolution and the solvency statement (if any) must be publicly available for inspection.
To satisfy the publicity requirements, the company must lodge with ACRA via BizFile+, within 8 days beginning with the resolution date:
- A notice containing the text of the special resolution for reducing share capital;
- The resolution date; and
- The reduction information
The company may also publish a notice on the reduction in a Singapore daily newspaper.
If the capital reduction is successful, the information lodged will be made available for inspection for up to 1 month after the reduction.
Opportunity for Creditors to Object to the Capital Reduction
Creditors may apply to court to challenge the company’s application for a non-court approved capital reduction within 6 weeks of the resolution date.
The court will cancel a capital reduction order if:
- Any applicant creditor’s debt or claim is outstanding, and it has not been secured or safeguarded; and
- It is necessary to secure or safeguard these debts or claims in view of the company’s remaining assets after the reduction
If there are any creditor objections present:
- As soon as possible, the company must give notice to ACRA of the creditor objection(s);
- The creditor objection(s) must be dismissed by the court; and
- The company must, within 15 days from the date of dismissal of the last creditor objection, lodge a solvency statement, a statement from the directors that all creditor objection(s) have been dismissed, the court order(s) dismissing the objection(s), and a notice containing the reduction information.
If there are no creditor objections, the company must submit the special resolution, solvency statement, director’s declaration and notice containing the reduction information with ACRA via BizFile+ within 8 weeks of the resolution date.
The capital reduction will only take effect when ACRA has recorded the reduction information in the register.
The choice between a court-approved or non-court-approved capital reduction method is for the company to make.
Generally, the court-approved method is preferred by companies due to its finality. Once the capital reduction is approved by the court, it becomes more difficult for creditors to challenge such a decision on the basis of unfairness.
Furthermore, as previously mentioned, there would be less potential liability on the part of the board of directors, as there is no need to prepare a solvency statement.
That said, the non-court approved method is simpler, faster, and requires no payment of fees to the court.
Please visit the BizFile+ website for more information on the application process and submission of forms for a proposed capital reduction.
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