How to Reduce Share Capital
Running a company is not easy and if you own one in Singapore, then you might be faced with the decision to reduce the share capital should certain circumstances crop up, here are some scenarios which may warrant such a move:
- Your shareholders wish to cancel their shares in the company and need to be compensated.
- You may need to reduce share capital in order to leverage your company’s Debt/Equity Ratio.
- A reduction in share capital can permit your company to pay up on dividends, buy back shares or generate funds for other corporate requirements.
- Share capital can be converted into debentures or bonds.
- A reduction in share capital is useful if you want to reduce or cancel your company’s paid up shares or unpaid up shares.
You must ensure that the any of the reasons you cite should comply with the Section 78A of The Company Act of Singapore, as long as the citation complies, you can execute the reduction with or without a court’s approval. In either of the case, your company’s director and share holders must make and file a special resolution which is restricted by the company’s memorandum.
This is due to newer legislation however, as until previously all such actions were governed by Section 73 of the Company’s Act and a company was required to present their case for a special resolution in a court of law; share capital could only be reduced if it was sanctioned. The company could then lodge their case with the Accounting and Corporate Regulatory Authority of Singapore with or without the creditor’s approval.
This legislation has been replaced with the newer Section 78A-78K which institutes recommendations made by the Company Legislation and Regulatory Framework Committee (CLRFC). The company no longer requires the court’s approval in order to reduce its share capital. However, under this legislation, public companies are required by the Ministry of Finance to publish a notice of its intention to reduce share capital in advance in a national press. Private companies on the other hand will have to either publish a notice in the press or provide their share holders with a direct notification.
The new legislation also requires the director of the company to make a solvency statement which complies with the Company Act Section 7A Solvency Test as well as the publicity requirements, guidelines for the both of which are available on the ACRA website. The solvency statement is to be made available to the creditors and shareholders of the company. Once the solvency statement is prepared, the director will need to submit it with the Comptroller of Income tax for tax processing. Finally, the company is required to inform the IRAS about their intention to reduce their share capital. Both the resolution and statement must be submitted within 8 working days with effect from the resolution date.
The creditors and shareholders can object to the reduction in share capital between six to eight weeks of the resolution date through court order. If no objections are received within said time, then the company can reduce its share capital.
In order to ensure that the proceedings remain compliant with the law, a professional advisory committee can be utilized by the company.