Vol 5 (2008) - Issue 4

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Realising Investment in the UK under the Companies Act 2006

Realising an investment in a company registered in the UK can be a complicated procedure for shareholders, with intricate legislation dictating how and when they are able to extract their wealth from a company.

The Companies Act 2006, which received Royal Assent in November 2006 and will be implemented in full by October 2009, consolidates changes made to company law in the UK over the last 20 years, whilst also introducing many reforms. The approach to legislating was to ‘think small first’, introducing a more lightly regulated regime for private companies.

This article considers the effects on shareholders wishing to extract their wealth from a company registered in the UK and also notes some potential risks to those dealing with companies from which shareholders are extracting value.

The Act has a significant impact on one of the core concepts of UK company law – that of share capital maintenance. The basic principle of this, is that maintaining share capital and only distributing profits available for the purpose, provides a ‘buffer’ so as to balance the perceived dangers created by limiting the shareholders’ liability. The theory is that money invested by shareholders cannot be withdrawn without due process, thereby protecting unsecured creditors.

Many commentators have questioned how effective these rules actually are in protecting the position of creditors given that there is no minimum capitalisation required to set up a company and in any event the non-distributable capital can be eroded by unsuccessful trading. Consequently, many see the restrictions placed on private limited companies in the UK as both unnecessary and overly bureaucratic. The Companies Act 2006 aims to address these concerns.

Existing legislation

Before evaluating what is different about the Companies Act 2006, it is appropriate to outline some of the more usual ways a shareholder may expect to realise his or her investment in the UK under existing legislation.

Dividends

Under current law, companies may only pay a dividend to shareholders from profits that are available for the purpose. A payment may only be made from accumulated realised profits less accumulated realised losses. In addition to this, public companies, regardless of whether they are listed, must take into account any net unrealised losses, as a dividend cannot be paid if the net assets would be reduced to less than the company’s called up share capital and undistributable reserves.

Common law also requires directors to act in the best interests of the company, meaning that they should not pay a dividend which may be compliant with the Companies Act, but where, for example, the outflow of cash will jeopardise the company’s prospects.

Sale of shares

The sale of shares is an obvious option for a shareholder wanting to realise his or her investment for both listed and privately held companies. It may be the case, however, that there is no external market for the shares of an unlisted company, or that the other existing shareholders are unable or unwilling to buy. This is particularly true for owner-managed businesses where there is no clear successor and the owner ‘is’ the company.

Members’ voluntary (solvent) liquidation

This is the only risk free way to distribute legally, share capital and reserves which are otherwise nondistributable, and the process requires the services of a licensed insolvency practitioner, to act as liquidator. It pre-supposes that the company will not continue, although it may be possible for the trade to continue if it can be sold to another vehicle before or concurrently with the liquidation. Indeed a members’ voluntary liquidation of the company is frequently used where different parts of a company’s operations are to be separated into new companies or partitioned between two or more shareholders (or groups of shareholders).