Clause 560: Notice to registrar of sub-division or consolidation

892.     The clause replaces a similar requirement to notify the registrar contained in section 122(1)(a) and (d) of the 1985 Act. Where a company sub-divides or consolidates its share capital under clause 559 (Sub-division or consolidations of shares), it will continue to be required to give notice of this alteration to its share capital to the registrar within one month. However, there is a new requirement to file a statement of capital (see subsections (2) and (3)), which is in essence a "snap-shot" of the company's total share capital at a particular point in time: in this case following the consolidation/sub-division.

893.     For public companies, the requirement for a statement of capital is linked to the abolition of authorised share capital as it implements Article 2 of the Second Company Law Directive (77/91/EEC) which states:

"the statutes or instruments of incorporation of the company shall always give at least the following information..(c) when the company has no authorized capital, the amount of the subscribed capital..".

894.     The statement of capital will require the following information to be provided:

• the total number of shares of the company

• the aggregate nominal value of those shares

• for each class of shares, particulars of the rights attached to those shares, the total number of shares of that class and the aggregate nominal value of shares of that class, and

• the amount paid up and the amount (if any) unpaid on each share.

895.     Whilst this Directive only applies to public companies it is important that the information on the public register is up-to-date. A statement of capital will, therefore, be required where it is proposed that a company formed under the Bill will have a share capital on formation and, with limited exceptions (in particular, where there has been a variation of class rights which does not affect the company's aggregate subscribed capital) whenever a company makes an alteration to its share capital (whether under the Bill or under the remaining provisions of the 1985 Act).

896.     In making a statement of capital, a company is required to provide "prescribed particulars of the rights attached to the shares". Here, and elsewhere in the Bill where a statement of capital is called for, "prescribed" means prescribed by statutory instrument made by the Secretary of State (see section 744 of the 1985 Act - which is retained).

897.     The power conferred on the Secretary of State under this clause enables the Secretary of State to specify the particular detail of the information which he requires to be filed with the registrar by a company. A statutory instrument made pursuant to this power is not subject to any form of Parliamentary scrutiny.

898.     Criminal liability for any failure to comply with the procedural requirements as to notice is retained (see subsection (4)). The penalty for this offence is set out in subsection (5).

Clause 561: Re-conversion of stock into shares

899.     Stock cannot be issued directly by a company but arises from a conversion of fully paid up shares into stock under section 121(2)(c) of the 1985 Act. This ability to

convert shares into stock has not been retained. A company that currently has stock may, however, wish to re-convert this stock back into fully paid shares.

900.     This clause replaces section 121(2)(c) of the 1985 Act. It retains the ability to re-convert stock back into fully paid shares but removes the requirement for authorisation in the articles (currently a company may only re-convert stock back into shares if provision for this is made in its articles).

901.     A re-conversion of stock into shares will continue to require an ordinary resolution of the company's members. Such a resolution may give the directors power to convert stock into fully paid shares on more than one occasion; at a specified time; or only if certain conditions are met (see subsection (3)). The flexibility to pass a conditional resolution (that is, a resolution that will only take effect if certain conditions are met) is necessary as a re-conversion of stock into shares may form part of a wider re-organisation of a company's share capital.

902.     Where a company re-converts stock into shares it must give notice of the alteration to its share capital to the registrar. This requirement replaces a similar provision in section 122(1)(c) of the 1985 Act. A statement of capital is also required (see note on clause 560: Notice to registrar of sub-division or consolidation).

903.     Criminal liability for any failure to comply with the procedural requirements as to notice is retained (see subsection (7)). The penalty for this offence is set out in subsection (8).

Clause 562: Notice to registrar of alteration of share capital

904.     Much of section 122 of the 1985 Act (Notice to registrar of alteration) is replaced by various provisions in the Bill or will be repealed, for example, clause 560 (Notice to registrar of sub-division or consolidation) replaces section 122(1)(a) and (d). This clause amends current section 122 to update the requirements as to notice for those provisions which remain, in particular the provisions which refer to an alteration of capital in connection with a redemption of shares (contained in section 122(1)(e)) and to a cancellation of the company's share capital otherwise than in connection with a reduction of capital (contained in section 122(1)(f)). The amendment introduced by this clause is that in future a statement of capital (see note on clause 560: Notice to registrar of sub-division or consolidation) will also be required where the company gives notice under section 122 of an alteration to its share capital in the two circumstances remaining referred to above.

905.     Where a company fails to comply with the procedural requirements as to notice, the company and every officer of the company who is in default commits an offence. The penalty for this offence is a fine and, for continued contravention, a daily default fine

906.     Section 123 of the 1985 Act (Notice to registrar of increased share capital) is repealed. The notice procedure in this section is replaced by the return that will in future be made under clause 545 (Return of allotment by limited company) and clause 546 (Return of allotment of new class of shares by unlimited company) when a company allots new shares.

Reserve capital

907.     Under section 120 of the 1985 Act, a limited company may, by special resolution of the company's members, set aside any portion of its share capital which has not already been called up on terms that this capital is incapable of being called up, other than in the event of the company being wound up. Called up share capital is defined in section 737 of the 1985 Act. Where a portion of a limited company's uncalled capital is set aside in this way, it is known as reserve capital. Similar provision is made under section 124 of that Act for unlimited companies (having a share capital) who are proposing to re-register as a public company or as a private limited company.

Clause 563: Abolition of reserve capital

908.     As recommended by the CLR (Company Formation and Capital Maintenance, pages 119 and 123), this clause repeals sections 120 (reserve capital of limited company) and 124 (reserve capital of unlimited company) of the 1985 Act. The effect of these repeals is that in future it will not be possible for a company to create reserve capital.

909.     The repeals will not affect the validity of a resolution to create reserve capital, either under section 120 (subject to a copy of the resolution being duly filed with the registrar) or section 124, passed prior to the date that these repeals take effect (see subsection (3)).

Class rights

Clause 564: Variation of class rights: companies having a share capital

910.     The following group of clauses is concerned with the variation of class rights. The CLR recommended that the current provisions should be retained with some simplification, and extended to companies without a share capital (Final Report, paragraph 7.28). The clauses insert new sections into the 1985 Act to replace sections 125-126 of that Act and amend sections 127-129 of that Act.

911.     Sections 125 - 127 of the 1985 Act are concerned with the manner in which rights attached to a class of shares can be varied. Class rights may be set out in the memorandum or articles or elsewhere, and provision may or may not be made for their alteration. Class rights could cover matters such as voting rights, rights to dividends and rights to a return of capital on a winding up.

New section 125: Variation of class rights: companies having a share capital

912.     Class rights are "attached to a class of shares" (subsection (1)). Where all the shares in a company fall within the one class, there are no class rights, only shareholder rights. What amounts to a class is not defined either in the current law or the Bill (other than in clause 808: Classes of shares) and remains a matter for case law.

913.     The proposed new section 125 replaces the need for an extraordinary resolution with a special resolution (subsection (4(b)). As explained in relation to Part 13 (Resolutions and meetings), the Bill abolishes the concept of an extraordinary resolution. Special resolution is defined in clause 266 (Special resolutions).

914.     Subsections (2) and (4) provide that rights may be varied but only if the holders of at least three-quarters in nominal value of the issued shares of that class consent in writing or a special resolution passed by the holders of that class sanctions the variation. This rule is to apply, notwithstanding that the articles may specify a less demanding procedure - whether by substituting a lower majority (for example, that the holders of 51% by nominal value of the class consent in writing), or by permitting a simple majority of the class at a class meeting or by requiring only a simple majority of the shareholders as a whole.

915.     However, in subsection (3) the provision is expressed to be without prejudice to any other restriction on the variation of rights. This has two important effects. First, if and to the extent that the company has adopted a more onerous regime in its articles for the variation of class rights, for example requiring a higher percentage than the statutory minimum, the company must comply with the more onerous regime. Second, if and to the extent that the company has protected class rights by making provision for the entrenchment of those rights in its articles (see clause 22: Entrenched provisions of the articles), that protection cannot be circumvented by changing the class rights under this clause.

916.     Subsections (5) and (6) reflect subsections (7) and (8) of the existing section.

Clause 565: Variation of class rights: companies without a share capital

917.     New section 125A, to be inserted into the 1985 Act by this clause, extends the statutory provisions on variation of class rights to companies without a share capital. Companies limited by guarantee (which since December 1980 cannot be formed with a share capital) may, for example, have different classes of members with different voting rights.

918.     At present the question of how members' rights may be varied will depend to a large extent on whether provision has been made, either in the memorandum or articles, for their variation.

919.     This clause inserts a new provision, comparable to those for companies with a share capital. Thus there is a minimum requirement that class rights may be varied if three-quarters of that class consent in writing or a special resolution of those members

sanctions the variation. Again, where there is a higher requirement in the articles or elsewhere, this would apply.

Clause 566: Variation of class rights: saving for court's power under other provisions

920.     This clause is consequential on clauses 564 (Variation of class rights: companies having a share capital) and 565 (Variation of class rights: companies without a share capital) and other provisions of the Bill. It inserts a new section 126 into the 1985 Act which, like the current section 126, preserves the court's powers under other provisions.

Clause 567: Variation of class rights: right to object to variation

921.     This clause inserts two new sections into the 1985 Act: new section 127A and new section 127B.It also amends section 127 of that Act (which confers a right on shareholders to object to a variation of class rights) to provide that it applies where class rights are varied under section 125. New section 127A sets out the procedure that must be followed where there is an objection to a variation of members' rights in a company without a share capital. It enables members, amounting to not less than 15% of the members of the class affected, to apply to the court to have the variation cancelled and gives the court the power to confirm the variation, or disallow it if the court is satisfied that it would unfairly prejudice the members in that class.

922.     New section 127B sets out the procedural requirements as to notice where the court has made an order on an application under section 127 of the 1985 Act (as amended) or under new section 127A.

923.     Where the court has made an order on application under section 127 (as amended) or new section 127A, 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 new section 127B, the company, and every officer of the company who is in default, commits an offence (see subsections (2) and (3) of new section 127B).

Clause 568: Registration of class rights

924.     Where a limited company creates a new class of shares, it will in future provide details of the rights attached to the shares in the return of allotment and statement of capital required under clause 545 (Return of allotment by limited company). There is a similar requirement in clause 546 (Return of allotment of new class of shares by unlimited company) where an unlimited company allots a new class of share. Those provisions replace section 128(1) and (2) of the 1985 Act which will be repealed as a consequential amendment.

925.     Under the amendment made by this clause, where a company varies the rights attached to any shares (or assigns a name or other designation, or a new name or other designation to any class of its shares) it must register particulars of the rights affected 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 requires to be filed under section 380 of the 1985 Act.

926.     Unlike other alterations to a company's share capital, there is no requirement for a statement of capital here. This 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.

927.     Subsection (2) of this clause makes similar changes to section 129 of the 1985 Act. This section contains disclosure provisions which mirror section 128 but 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.

Share premiums

928.     Under section 130 of the 1985 Act, where shares in a company are issued at a premium, (that is, at a price which is greater than their nominal value), an amount equal to the premium paid on those shares must be transferred to a non-distributable reserve: the share premium account. This account can only be used in a limited number of circumstances described in section 130.

Clause 569: Application of share premiums

929.     In line with the recommendations of the CLR (Completing the Structure, paragraph 7.8), this clause amends section 130 to restrict further the application of the share premium account. In the future, companies will be unable to use the share premium account to write off preliminary expenses (that is, expenses incurred in connection with the company's formation). Companies will continue to be able to use the share premium account to write off any expenses incurred, or commission paid, but this will be limited so that the company will only be able to use the share premium account arising on a particular issue of shares to write off expenses incurred or commission paid in respect of that issue. As now, they will also be able to use the share premium account to pay up new shares to be allotted to existing members as fully paid bonus shares.

930.     A further change is that in future companies will not be able to use the share premium account to write off any expenses incurred, commission paid or discount allowed in respect of an issue of debentures or in providing for the premium payable on a redemption of debentures.

Reduction of share capital

931.     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. A company may also reduce its 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), both of which are retained. 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.

932.     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.

Clause 570: Circumstances in which companies may reduce share capital

933.     This clause amends section 135 of the 1985 Act. It sets out the circumstances and manner in which a company limited by shares may reduce its share capital under section 135 by inserting three new subsections - subsections (1), (1A) and (1B) - into this section. 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 clause 571: Reduction of capital supported by solvency statement).

934.     At the moment, a company may only reduce its share capital under section 135 if it is authorised to do so by its articles. In line with the recommendations of the CLR (Completing the Structure, paragraph 2.15), this requirement for prior authorisation 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 new subsection (2B) of section 135). There will be transitional arrangements for existing companies.

935.     New subsection (1)(a) contains a pointer 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 new subsection (1)(b).

936.     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) of amended section 135 if it will have at least one member remaining after the proposed reduction. That member need only hold one share in the company but that share must not be a redeemable share (see new section 135(1A). 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.

937.     Both the solvency statement procedure for capital reductions and the court-approved procedure require a special resolution of the company's members. Under new subsection (2A) of section 135 a special resolution to reduce a company's share capital under this clause 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 new section 135C(1) have been registered by the registrar (see new section 135C(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 section 425 of the 1985 Act, on delivery of those documents to the registrar (unless the court orders otherwise).

Clause 571: Reduction of capital supported by solvency statement

938.     This clause 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. It inserts three new sections into the 1985 Act: new sections 135A, 135B and 135C.

New section 135A: Requirement for solvency statement

939.     The procedural requirements that the directors must follow when they propose a capital reduction using the solvency statement route are set out in new section 135A.

940.     This provides that the solvency statement made in connection with a reduction of capital by a private company under new section 135(1) 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 new section 135C.

941.     New section 135A also provides that this solvency statement must be made available to the company's members when they vote on the resolution to reduce capital. 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) of new section 135A). 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 provisions of these subsections is subsequently filed with the registrar, every officer of the company who is in default commits an offence (see new section 135C(7)).

New section 135B: Solvency statement

942.     A solvency statement made under new section 135B 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 under amended section 135(1) unless the dissenting director or directors resign (in which case the solvency statement must be made by all of the remaining directors).

943.     The solvency statement must be in the "prescribed form" and "prescribed" in this context means prescribed by the Secretary of State by statutory instrument (see section 744 of the 1985 Act - which is retained by the Bill).

944.     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 clause 721 (Registrar's requirements) about how the statement is to be authenticated by the directors.

945.     In forming their opinions, the directors must take account of all the company's liabilities including contingent and prospective liabilities (see new section 135B(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.

946.     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 new section 135B(4)). The penalty for this offence is set out in new section 135B(5).