Company Law Reform Bill [HL] (389-394)

House of Commons

Session 2005 - 06
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Company Law Reform Bill [HL] (389-394)

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 1 — Restrictions on when distributions may be made
389

834
Net asset restriction on distributions by public companies
(1)
A public company may only make a distribution—
(a)
if the amount of its net assets is not less than the aggregate of its called-
up share capital and undistributable reserves, and
(b)
if, and to the extent that, the distribution does not reduce the amount of
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those assets to less than that aggregate.
(2)
For this purpose a company’s “net assets” means the aggregate of the
company’s assets less the aggregate of its liabilities.
(3)
“Liabilities” here includes—
(a)
where the relevant accounts are Companies Act accounts, provisions of
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a kind specified for the purposes of this subsection by regulations
under section 402;
(b)
where the relevant accounts are IAS accounts, provisions of any kind.
(4)
A company’s undistributable reserves are—
(a)
its share premium account;
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(b)
its capital redemption reserve;
(c)
the amount by which its accumulated, unrealised profits (so far as not
previously utilised by capitalisation) exceed its accumulated,
unrealised losses (so far as not previously written off in a reduction or
reorganisation of capital duly made);
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(d)
any other reserve that the company is prohibited from distributing—
(i)
by any enactment (other than one contained in this Part), or
(ii)
by its articles.

The reference in paragraph (c) to capitalisation does not include a transfer of
profits of the company to its capital redemption reserve.
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(5)
A public company must not include any uncalled share capital as an asset in
any accounts relevant for purposes of this section.
(6)
Subsection (1) has effect subject to sections 835 and 838 (investment companies
etc: distributions out of accumulated revenue profits).
Distributions by investment companies
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835
Distributions by investment companies out of accumulated revenue profits
(1)
An investment company may make a distribution out of its accumulated,
realised revenue profits if the following conditions are met.
(2)
It may make such a distribution only if, and to the extent that, its accumulated,
realised revenue profits, so far as not previously utilised by a distribution or
35
capitalisation, exceed its accumulated revenue losses (whether realised or
unrealised), so far as not previously written off in a reduction or reorganisation
of capital duly made.
(3)
It may make such a distribution only—
(a)
if the amount of its assets is at least equal to one and a half times the
40
aggregate of its liabilities, and
(b)
if, and to the extent that, the distribution does not reduce that amount
to less than one and a half times that aggregate.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 1 — Restrictions on when distributions may be made
390

(4)
For this purpose a company’s liabilities include—
(a)
in the case of Companies Act accounts, provisions of a kind specified
for the purposes of this subsection by regulations under section 402;
(b)
in the case of IAS accounts, provisions of any kind.
(5)
The following conditions must also be met—
5
(a)
the company’s shares must be listed on a recognised UK investment
exchange;
(b)
during the relevant period it must not have—
(i)
distributed any capital profits otherwise than by way of the
redemption or purchase of any of the company’s own shares in
10
accordance with Chapter 3 or 4 of Part 19, or
(ii)
applied any unrealised profits or any capital profits (realised or
unrealised) in paying up debentures or amounts unpaid on its
issued shares;
(c)
it must have given notice to the registrar under section 836(1) (notice of
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intention to carry on business as an investment company)—
(i)
before the beginning of the relevant period, or
(ii)
as soon as reasonably practicable after the date of its
incorporation.
(6)
For the purposes of this section—
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(a)
“recognised UK investment exchange” means a recognised investment
exchange within the meaning of Part 18 of the Financial Services and
Markets Act 2000 (c. 8), other than an overseas investment exchange
within the meaning of that Part; and
(b)
the “relevant period” is the period beginning with—
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(i)
the first day of the accounting reference period immediately
preceding that in which the proposed distribution is to be made,
or
(ii)
where the distribution is to be made in the company’s first
accounting reference period, the first day of that period,
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and ending with the date of the distribution.
(7)
The company must not include any uncalled share capital as an asset in any
accounts relevant for purposes of this section.
836
Meaning of “investment company”
(1)
In this Part an “investment company” means a public company that—
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(a)
has given notice (which has not been revoked) to the registrar of its
intention to carry on business as an investment company, and
(b)
since the date of that notice has complied with the following
requirements.
(2)
Those requirements are—
40
(a)
that the business of the company consists of investing its funds mainly
in securities, with the aim of spreading investment risk and giving
members of the company the benefit of the results of the management
of its funds;
(b)
that the condition in section 837 is met as regards holdings in other
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companies;

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 1 — Restrictions on when distributions may be made
391

(c)
that distribution of the company’s capital profits is prohibited by its
articles of association;
(d)
that the company has not retained, otherwise than in compliance with
this Part, in respect of any accounting reference period more than 15%
of the income it derives from securities.
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(3)
Subsection (2)(c) does not require an investment company to be prohibited by
its articles from redeeming or purchasing its own shares in accordance with
Chapter 3 or 4 of Part 19 out of its capital profits.)
(4)
Notice to the registrar under this section may be revoked at any time by the
company on giving notice to the registrar that it no longer wishes to be an
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investment company within the meaning of this section.
(5)
On giving such a notice, the company ceases to be such a company.
837
Investment company: condition as to holdings in other companies
(1)
The condition referred to in section 836(2)(b) (requirements to be complied
with by investment company) is that none of the company’s holdings in
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companies (other than those that are for the time being investment companies)
represents more than 15% by value of the company’s investments.
(2)
For this purpose—
(a)
holdings in companies that—
(i)
are members of a group (whether or not including the investing
20
company), and
(ii)
are not for the time being investment companies,

are treated as holdings in a single company; and
(b)
where the investing company is a member of a group, money owed to
it by another member of the group—
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(i)
is treated as a security of the latter held by the investing
company, and
(ii)
is accordingly treated as, or as part of, the holding of the
investing company in the company owing the money.
(3)
The condition does not apply—
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(a)
to a holding in a company acquired before 6th April 1965 that on that
date represented not more than 25% by value of the investing
company’s investments, or
(b)
to a holding in a company that, when it was acquired, represented not
more than 15% of the investing company’s investments,
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so long as no addition is made to the holding.
(4)
For the purposes of subsection (3)—
(a)
“holding” means the shares or securities (whether or one class or more
than one class) held in any one company;
(b)
an addition is made to a holding whenever the investing company
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acquires shares or securities of that one company, otherwise than by
being allotted shares or securities without becoming liable to give any
consideration, and if an addition is made to a holding that holding is
acquired when the addition or latest addition is made to the holding;
and
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(c)
where in connection with a scheme of reconstruction a company issues
shares or securities to persons holding shares or securities in a second

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 2 — Justification of distribution by reference to accounts
392

company in respect of and in proportion to (or as nearly as may be in
proportion to) their holdings in the second company, without those
persons becoming liable to give any consideration, a holding of the
shares or securities in the second company and a corresponding
holding of the shares or securities so issued shall be regarded as the
5
same holding.
(5)
In this section—
“company” and “shares” shall be construed in accordance with sections 99
and 288 of the Taxation of Chargeable Gains Act 1992 (c. 12);
“group” means a company and all companies that are its 51% subsidiaries
10
(within the meaning of section 838 of the Income and Corporation
Taxes Act 1988 (c. 1); and
“scheme of reconstruction” has the same meaning as in section 136 of the
Taxation of Chargeable Gains Act 1992.
838
Power to extend provisions relating to investment companies
15
(1)
The Secretary of State may by regulations extend the provisions of sections 835
to 837 (distributions by investment companies out of accumulated profits),
with or without modifications, to other companies whose principal business
consists of investing their funds in securities, land or other assets with the aim
of spreading investment risk and giving their members the benefit of the
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results of the management of the assets.
(2)
Regulations under this section are subject to affirmative resolution procedure.
Chapter 2
Justification of distribution by reference to accounts
Justification of distribution by reference to accounts
25
839
Justification of distribution by reference to relevant accounts
(1)
Whether a distribution may be made by a company without contravening this
Part, and the amount of a distribution that may be so made, is determined by
reference to the following items as stated in the relevant accounts—
(a)
profits, losses, assets and liabilities;
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(b)
provisions of the following kinds—
(i)
where the relevant accounts are Companies Act accounts,
provisions of a kind specified for the purposes of this subsection
by regulations under section 402;
(ii)
where the relevant accounts are IAS accounts, provisions of any
35
kind;
(c)
share capital and reserves (including undistributable reserves).
(2)
The relevant accounts are the company’s last annual accounts, except that—
(a)
where the distribution would be found to contravene this Part by
reference to the company’s last annual accounts, it may be justified by
40
reference to interim accounts, and
(b)
where the distribution is proposed to be declared during the
company’s first accounting reference period, or before any accounts

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 2 — Justification of distribution by reference to accounts
393

have been circulated in respect of that period, it may be justified by
reference to initial accounts.
(3)
The requirements of—
section 840 (as regards the company’s last annual accounts),
section 841 (as regards interim accounts), and
5
section 842 (as regards initial accounts),

must be complied with, as and where applicable.
(4)
If any applicable requirement of those sections is not complied with, the
accounts may not be relied on for the purposes of this Part and the distribution
is accordingly treated as contravening this Part.
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Requirements applicable in relation to relevant accounts
840
Requirements where last annual accounts used
(1)
The company’s last annual accounts means the company’s individual
accounts—
(a)
that were last circulated to members in accordance with section 429
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(duty to circulate copies of annual accounts and reports), or
(b)
if in accordance with section 432 the company provided a summary
financial statement instead, that formed the basis of that statement.
(2)
The accounts must have been properly prepared in accordance with this Act,
or have been so prepared subject only to matters that are not material for
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determining (by reference to the items mentioned in section 839(1)) whether
the distribution would contravene this Part.
(3)
Unless the company is exempt from audit and the directors take advantage of
that exemption, the auditor must have made his report on the accounts.
(4)
If that report was qualified—
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(a)
the auditor must have stated in writing (either at the time of their report
or subsequently) whether in his opinion the matters in respect of which
his report is qualified are material for determining whether a
distribution would contravene this Part, and
(b)
a copy of that statement must—
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(i)
in the case of a private company, have been circulated to
members in accordance with section 429, or
(ii)
in the case of a public company have been laid before the
company in general meeting.
(5)
An auditor’s statement is sufficient for the purposes of a distribution if it
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relates to distributions of a description that includes the distribution in
question, even if at the time of the statement it had not been proposed.
841
Requirements where interim accounts used
(1)
Interim accounts must be accounts that enable a reasonable judgment to be
made as to the amounts of the items mentioned in section 839(1)
40
(2)
Where interim accounts are prepared for a proposed distribution by a public
company, the following requirements apply.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 2 — Justification of distribution by reference to accounts
394

(3)
The accounts must have been properly prepared, or have been so prepared
subject to matters that are not material for determining (by reference to the
items mentioned in section 839(1)) whether the distribution would contravene
this Part.
(4)
“Properly prepared” means prepared in accordance with sections 401 to 403
5
(requirements for company individual accounts), applying those requirements
with such modifications as are necessary because the accounts are prepared
otherwise than in respect of an accounting reference period.
(5)
The balance sheet comprised in the accounts must have been signed in
accordance with section 420.
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(6)
A copy of the accounts must have been delivered to the registrar of companies.

Any requirement of Part 35 of this Act as to the delivery of a certified
translation into English of any document forming part of the accounts must
also have been met.
842
Requirements where initial accounts used
15
(1)
Initial accounts must be accounts that enable a reasonable judgment to be made
as to the amounts of the items mentioned in section 839(1).
(2)
Where initial accounts are prepared for a proposed distribution by a public
company, the following requirements apply.
(3)
The accounts must have been properly prepared, or have been so prepared
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subject to matters that are not material for determining (by reference to the
items mentioned in section 839(1)) whether the distribution would contravene
this Part.
(4)
“Properly prepared” means prepared in accordance with sections 401 to 403
(requirements for company individual accounts), applying those requirements
25
with such modifications as are necessary because the accounts are prepared
otherwise than in respect of an accounting reference period.
(5)
The company’s auditor must have made a report stating whether, in his
opinion, the accounts have been properly prepared.
(6)
If that report was qualified—
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(a)
the auditor must have stated in writing (either at the time of his report
or subsequently) whether in his opinion the matters in respect of which
his report is qualified are material for determining whether a
distribution would contravene this Part, and
(b)
a copy of that statement must—
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(i)
in the case of a private company, have been circulated to
members in accordance with section 429, or
(ii)
in the case of a public company have been laid before the
company in general meeting.
(7)
A copy of the accounts, of the auditor’s report and of any auditor’s statement
40
must have been delivered to the registrar.

Any requirement of Part 35 of this Act as to the delivery of a certified
translation into English of any of those documents must also have been met.