New section 135C: Registration of resolution and supporting documents

996.     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 clause 31) and it will not take effect until the solvency statement and statement of capital (as referred to in subsection (1) of new section 135C) are registered by the registrar.

997.     As with all circumstances where the company makes an alteration to its subscribed capital, the company is required to deliver a statement of capital (see note on clause 552) to the registrar.

998.     In addition to making a solvency statement in accordance with new section 135B, 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 new section 135A (see new section 135C(5)).

999.     In addition to the new offences in new section 135B(4) and 135C(7) (referred to above), where a company fails to comply with any of the filing requirements under new section 135C, an offence is committed by the company and every officer of the company who is in default (see new section 135C(8)). The penalty for this offence is set out in new section 135C(9).

Clause 563: Registration of court order

1000.     Under section 138 of the 1985 Act, a resolution to reduce capital using the existing court approved scheme (which is retained by clause 561), currently 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.

1001.     Subsections (1) to (4) and (6) of this clause update section 138 by replacing the current requirement for a minute of the reduction with a statement of capital (see note on clause 552). Like the minute confirming the reduction, this statement must be approved by the court.

1002.     In line with the CLR's recommendations (Final Report, paragraph 13.11), subsection (5) of this clause amends section 138 to enable a capital reduction which forms part of a compromise or arrangement under section 425 of the 1985 Act to 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 (2A)).

1003.     In all other cases, that is, where the reduction of capital does not form part of a compromise or scheme of arrangement under section 425 of the 1985 Act, the reduction will, as now, take effect on registration of the court order confirming the reduction (and statement of capital) by the registrar.

1004.     Subsection (7) makes minor consequential amendments to section 138, which are required as a result of the abolition of the requirement for the memorandum of a company to state its authorised share capital.

Clause 564: Liability of members on reduced shares etc

1005.     This clause makes textual amendments to section 140 of the 1985 Act consequential on the replacement of the requirement for a minute approved by the court with the requirement to file a statement of capital. It also makes clear that subsection (2) of section 140 only applies where the reduction of capital is made under the court-approved procedure.

Financial assistance

1006.     Chapter 6 of Part 5 of the 1985 Act contains a prohibition on the giving of financial assistance (broadly defined) by a company or any of its subsidiaries for the purpose of the acquisition of shares in itself. There are exceptions which apply to all companies in section 153 and a relaxation of the general rule for private companies in sections 155 to 158 of that Act.

Clause 565: Financial assistance by company for acquisition of shares

1007.     As recommended by the CLR (Final Report, paragraph 10.6), this clause abolishes the prohibition on the giving of financial assistance by a private company for the purchase of shares in itself. As a consequence, the relaxations for private companies in sections 155 to 158 (sometimes referred to as the "whitewash" procedure) are no longer required and these provisions are repealed by subsection (3) of this clause.

1008.     This clause replaces current section 151 of the 1985 Act with two new sections: new section 151 and new section 151A.

New section 151: Prohibited financial assistance: acquisition of shares in public company

1009.     The general prohibition on the giving of financial assistance by a public company is required by the Second Company Law Directive (77/91/EEC) and this prohibition is retained in amended section 151(1). As under the current law, the prohibition extends to post-acquisition assistance (new section 151(2)).

1010.     The prohibition on the giving of post-acquisition assistance only applies if the company in which the shares were acquired is a public company at the time that the assistance is given (see new section 151(2)(b)). It follows that where a company has re-registered as a private company since the shares were acquired and is a private company at the time the post acquisition assistance is given, the prohibition in this clause will not apply. However, if at the time the shares were acquired the company was a private company, but at the time the post-acquisition assistance is given it has re-registered as a public company, the prohibition will apply.

1011.     The exceptions in section 153 are retained by new section 151(3) (see clause 566).

1012.     If a company contravenes new section 151, the company and every officer of the company who is in default commits an offence (see subsections (4) and (5) of new section 151). This reflects the existing law.

New section 151A: Prohibited financial assistance: acquisition of shares in private company

1013.     This clause retains the current prohibition on the giving of financial assistance by a public company subsidiary for the purpose of an acquisition of shares in its private holding company. It also retains the prohibition on the giving of post acquisition assistance by a public company subsidiary.

1014.     Where a public company contravenes this section, the company and every officer of the company who is in default commits an offence (see new section 151A(4)). The penalty for this offence is retained in new section 151A(5).

Clause 566: Circumstances in which financial assistance is not prohibited

1015.     This clause makes consequential amendments to section 153 of the 1985 Act. It inserts two new subsections into this section of that Act (subsections (2A) and (2B)) to reflect the new provisions in section 151A relating to private companies.

1016.     These subsections carry forward the current exemption to the prohibition on the giving of financial assistance, namely that such assistance is not prohibited if the principal purpose of the assistance is not to give it for the purpose of an acquisition of shares, or where this assistance is incidental to some other larger purpose of the company (see subsection (3)). In these circumstances no offence is committed by the company or its officers.

Redeemable shares

1017.     Under current section 159 of the 1985 Act a company that is limited by shares, or limited by guarantee and having a share capital, may, if authorised to do so by its articles, issue shares which may be redeemed at a future point in time at the option of the company or the shareholder.

Clause 567: Redeemable shares

1018.     This clause amends section 159 of the 1985 Act to make changes to the way in which companies may issue redeemable shares and redeem such shares.

1019.     For private companies only, it removes the requirement for prior authorisation in the company's articles for a proposed allotment of redeemable shares. It also removes the current requirement in subsection (3) of section 159 that the terms of redemption must provide for payment on redemption. In its place is new subsection (4), which, subject to agreement between the company and the holder of the share or shares in question, permits the amount to be paid on a date later than the redemption date.

1020.     This clause also inserts new section 159A (terms and manner of redemption determined by directors) into the 1985 Act. As recommended by the CLR (Final Report, paragraph 4.5), this new section enables the directors of both private and public companies alike to determine the terms, conditions and manner of a redemption of redeemable shares. The power conferred on the directors by this new section requires prior authorisation by the company's members, either by resolution of the company or through the articles. This replaces section 160(3) (which provides that the terms and manner of redemption must be set out in the company's articles) and existing section 159A (also entitled "terms and manner of redemption"), which was inserted into the 1985 Act by section 133 of the Companies Act 1989 and remains uncommenced. As recommended by the CLR (Final Report, paragraph 7.30) the terms and conditions of redemption will require to be stated in the statement of capital required to be filed under clause 539.

1021.     Where the directors exercise this power they must do so before the shares in question are allotted (see new section 159A(2)).

Purchase by company of its own shares

1022.     Section 162 of the 1985 Act enables a company limited by shares or limited by guarantee and having a share capital to purchase its own shares, providing it is authorised to do so by the articles. It is common for the members to give authority for such a purchase of own shares through the articles, see, for example, regulation 35 of Table A.

Clause 568: Power of company to purchase own shares

1023.     In line with the recommendations of the CLR (Completing the Structure, paragraph 2.15), this clause amends section 162(1) of the 1985 Act to remove the requirement for authorisation in a company's articles for a purchase of own shares (including any redeemable shares) by the company. This clause also makes it clear that, if they wish, the members may restrict or prohibit a purchase of own shares by including a provision to this effect in the company's articles. There will be transitional provisions for existing companies which will enable such companies to decide whether they need to build such a restriction into the company's articles.

Clause 569: Statement of capital on disclosure by company of purchase etc of own shares

1024.     This clause updates sections 169 (disclosure by company of purchase of own shares) and 169A (disclosure by company of cancellation or disposal of treasury shares) of the 1985 Act to require a company that has to make a return to the registrar under these sections to provide the registrar with a statement of capital (see note on clause 552) at the time of the return.

Clause 570: Copy of contract or memorandum of terms to be available for inspection

1025.     This clause restates the current requirement in section 169 that where a company enters into a contract for a purchase of own shares it must make available for inspection a copy of the relevant contract or a memorandum of its terms at the company's registered office for a period of 10 years. If the company is private, it must be available for inspection by any of its members; otherwise it must be open to inspection by anyone. If default is made an offence is committed by every officer in default.

Clause 571: Power of private companies to redeem or purchase own shares out of capital

1026.     Sections 171 to 177 of the 1985 Act provide a statutory scheme for the redemption or purchase of own shares out of capital. This scheme is available to private companies only.

1027.     Before a private company may make a payment out of capital, the directors must have made a full enquiry into the affairs and prospects of the company and are required to make a statutory declaration confirming that: as regards the company's situation immediately after the date on which the payment out of capital is made, there will be no grounds on which the company could then be found unable to pay its debts; and as regards the company's prospects for the year immediately following that date, the company will continue to carry on business as a going concern and be able to pay its debts as they fall due in the year immediately following the date on which the payment out of capital is made.

1028.     In forming their opinion on the company's solvency and prospects, the directors must take into account the same liabilities (including contingent and prospective liabilities) as would be relevant under section 122 of the Insolvency Act 1986 (winding up by the court) to the question whether a company is unable to pay its debts.

1029.     Consistent with the approach taken in respect of reductions of capital using the new solvency statement procedure (see clause 562 and in particular subsection 2 of new section 135B), where a private company limited by shares uses this statutory scheme in sections 171 to 177 it will in future have to take account of all contingent and prospective liabilities, not just those that are relevant for the purposes of section 122 of the Insolvency Act 1986. This change is achieved by the amendment to section 173(4) of the 1985 Act set out in subsection (1) of this clause.

1030.     As a purchase or redemption of shares out of capital will affect a company's capital, companies will in future be required to give notice of this alteration to the registrar (see new section 177A - inserted into the 1985 Act by this clause): this notice must be accompanied by a "statement of capital" (see note on clause 552).

1031.     Where a company fails to comply with the procedural requirements as to notice contained in new section 177A, the company and every officer of the company who is in default commits an offence. The penalty for this offence is set out in new section 177A(5).

Transfers of shares etc

1032.     Under section 183 of the 1985 Act, if a company refuses to register a transfer of shares (or debentures), it must, within two months of receipt of the transfer, send to the transferee notice of its refusal to register the transfer of shares. Such a refusal will not affect the transferee's beneficial interest in a share, for example, he will still be entitled to any dividend declared on that share, and a return of capital on winding-up, but the transferee will not be able to exercise all of the rights of a member of the company, for example, he may not vote at meetings, until such time as the transfer is registered and his name is entered in the register of members.

Clause 572: Registration of transfer of shares and debentures

1033.     This clause does two things: it inserts new section 183A into the 1985 Act and makes consequential amendments to section 183 of that Act.

New section 183A: Registration of allotment and transfer of shares and debentures

1034.     This clause amends the law on the registration of allotments and transfers of shares and debentures to require the directors to:

• register an allotment of shares and debentures as soon as practicable (but in any event within two months of the date of allotment); and

• as recommended by the CLR, to register a transfer of shares or debentures or provide the transferee with reasons for their refusal to register (see Final Report, paragraphs 7.44 and 7.45).

1035.     In either case, this must be done as soon as practicable, but in any event within 2 months of the transfer being lodged with the company.

1036.     Under new section 183A(3), where the directors refuse to register the transfer of a share, the transferee is entitled to receive such information as he may reasonably require regarding the directors' refusal to register the transfer. Such information does not extend to minutes of meetings of the directors.

1037.     New section 183A(4) replaces section 183(4) of the 1985 Act. It does not make any substantive changes to the current position and, as now, where a transferor of a share or other interest in a company asks the company to register a transfer of shares, that application is to be treated as if it is made by the transferee (and will, therefore, be subject to the changes referred to above).

1038.     Where a company fails to comply with new section 183A, the company and every officer of the company who is in default commits an offence. The penalty for this offence is set out in new section 183A(6).

1039.     New section 183A(7) makes it clear that new section 183A does not apply to an allotment or transfer of shares if the company has issued a share warrant in respect of the shares under section 188 of the 1985 Act (see note on clause 119 (share warrants)) or in relation to a transmission of shares by operation of the law (that is, where a Trustee in Bankruptcy or Personal Representative of a deceased member's estate acquires an interest in a share as a result of the bankruptcy or death of a member).

1040.     These new provisions are expressed to apply in relation to allotments and transfers of shares and debentures that take effect after the commencement of these provisions.

Clause 573: Share certificates and share warrants

1041.     This clause amends section 185 of the 1985 Act to take account of clause 119 (share warrants) which permits companies to issue warrants to bearer in respect of fully paid shares, without first having to issue the shares in registered form and then convert them to bearer form.

1042.     This clause provides that a company need not issue a share certificate where it has issued a share warrant, but makes it clear that such a certificate must be issued where a share warrant is subsequently surrendered. It gives a company two months from the date of surrender to complete and have ready for delivery a certificate of the shares specified in the warrant. This requirement is subject to any contrary provisions in the company's articles, which may give the company more or less time to deliver such certificates to the transferee.

Register of debenture holders

Clause 574: Register of debenture holders

1043.     This clause replaces section 190 of the 1985 Act. There is no requirement on a company to keep a register of debenture holders. However, if such a register is kept, then the company must comply with this clause, which requires the register to be kept available for inspection either at its registered office or at another place in the part of the UK in which the company is registered and to notify the registrar of where it is so kept. It mirrors the requirements for the company's register of members (see clause 114(1) to (3), (5) and (6)).

Clause 575: Right to inspect register etc

1044.     This clause replaces section 191(1)-(6) of the 1985 Act. It retains the existing right of public access to any register of debenture holders kept by a company.

Clause 576: Time limit for claims arising from entry in register

1045.     This clause replaces section 191(7) of the 1985 Act. It amends the existing time limit for claims arising from errors in the register from twenty years to ten years. This mirrors equivalent provisions applicable to the register of members (see clause 125).

Distributions

1046.     The most common form of distribution is a dividend, but the provisions of Part 8 of the 1985 Act (distribution of profits and assets) apply to all forms of distribution of a company's assets to its members and include, for example, the transfer of assets to a member where the consideration received by the company is less than the value of the asset in question. A distribution of a non-cash asset is referred to as a "distribution in kind".

Clause 577: Distributions in kind

1047.     This clause inserts two new sections: new section 275A and new section 280A into Part 8 of the 1985 Act.

New section 275A: Distribution in kind arising on disposition of non-cash asset at an undervalue: determination of amount

1048.     In Capital Maintenance Other Issues (paragraphs 24 to 43) the CLR explored the difficulties created by the decision in Aveling Barford Ltd v. Perion Ltd [1989] BCLC 626 and made a number of suggestions as to how these difficulties might be overcome. New section 275A is intended to remove doubts to which the decision in this case has given rise about when a transfer of an asset to a member amounts to a distribution. The concern relates to the impact of the decision on intra-group asset transfers conducted by reference to book value rather than the higher market value. The decision concerned the sale of a property by a company (which had no distributable profits) at a considerable undervalue to another company controlled by the company's ultimate sole beneficial shareholder. The transaction was held to be void as an unauthorised return of capital. It decided nothing about the situation where a company, which has distributable profits, makes an intra group transfer of assets at book value, but concern has been expressed that as a transfer of an asset at book value may have an element of undervalue, the transaction would constitute a distribution thereby requiring the company to have distributable profits sufficient to cover the difference in value. The result has been that companies are often required either to abandon a transfer or to structure it in a more complex way, for example, having the assets revalued and then sold (or distributed under section 276) so that the distributable reserves are increased by the "realised profit" arising on the sale/distribution followed by a capital contribution of the asset to the relevant group member. The clause preserves the position in the Aveling Barford case such that where a company which does not have distributable profits makes a distribution by way of a transfer of assets at an undervalue, this will be an unlawful distribution contrary to Part 8 of the 1985 Act. It, however, clarifies the position where a company does have distributable profits.

1049.     This clause provides that where the conditions referred to in new section 275A(3) are met, the amount of any distribution arising from the sale, transfer or other disposition by a company of a non-cash asset to a member of the company should be calculated by reference to the value at which that asset is included in the company's accounts, that is, its "book value" (see new section 275A(2)). Thus, if an asset is transferred for a consideration equal to its book value, the amount of the distribution is zero, but if the asset is transferred for a consideration less than its book value, the amount of the distribution is equal to that shortfall (which will therefore need to be covered by distributable profits). This avoids the potential need for many companies to carry out asset revaluations requiring professional advice and incurring fees to advisors prior to making a distribution of a non-cash asset.

1050.     The conditions in new section 275A(3) are that at the time of the disposition of the asset, the company has profits available for distribution and that such a distribution would not contravene section 263 (general limit on distributions) and section 264 (restriction on distribution of assets by public companies) of the 1985 Act.

1051.     Under subsection (4) of new section 275A, in determining whether it has profits available for distribution (defined in section 263(3) of the 1985 Act), a company may treat any profit that would arise on the proposed disposition of the non-cash asset (that is, the amount (if any) by which the consideration received exceeds the book value of the asset) as increasing its distributable profits.

1052.     If the conditions set out in new section 275A(3) are not met, the amount of the distribution is calculated by reference to the market value of the asset in question. The amount of the distribution will in these circumstances be the excess of the market value of the asset over the consideration received by the company.

1053.     The clause also amends section 276 (distributions in kind: treatment of unrealised profits), which applies where a company "makes a distribution of or including a non-cash asset" and allows a company which has revalued assets showing an unrealised profit in the accounts, to treat that profit as a realised profit where the distribution is one of, or including, a non-cash asset. Under the amendment section 276 applies where a company makes a distribution arising from the sale, transfer or other disposition by it of a non-cash asset, in other words in the same circumstances as are described in section 275A.

New section 280A: Application of rules of law restricting distribution

1054.     New section 280A(1) preserves the existing common law rules on unlawful distributions - which continue to be an essential component in determining what amounts to an unlawful distribution.

1055.     New section 280A(2) makes an exception to this: the lawfulness and amount of distributions in kind are established by the statutory rules and not by any applicable common law rules.