Due to the COVID-19 pandemic, a lot of our clients have contacted us regarding the process of reduction of capital to increase their cash flow. If you are also wondering how you can achieve an increase in your cash flow through a reduction of capital, then we can help you.
Before you can understand how to reduce your capital, you must understand what share capital is. Share capital is any amount that the shareholders of a company invest in your company by acquiring the shares of your company. Your company can use the share capital to carry out its operations. The share capital can easily be increased or altered by companies, subject to certain conditions.
There are two types of share capital that a company can reduce. These include paid-up share capital, which consists of shares that are fully paid for by the shareholders or unpaid share capital, which consist of shares for which the shareholders have not made any payment or have only made partial payments. These shares will be paid for by the shareholder at a later date.
What are your options to reduce share capital?
When it comes to reducing the share capital of your company, you have two options. You can either reduce your share capital by the approval of the court or without it. You must fulfil some requirements to qualify for either of these options. Ultimately, you will have to choose which method is the best for your company.
Reducing capital with approval of the court
If you want to reduce the capital of your company with the approval of the court, a special resolution for the reduction must be passed and the reduction must be confirmed by the court. You must also send a notice to ACRA regarding the special resolution. Similarly, you must also acquire consent from your creditors stating that their debt is secured or safeguarded in your company. This is because the court will need to verify that the creditors of your company are not adversely affected by the reduction in capital.
Within 90 days of the court’s approval of the reduction, you must lodge a copy of the court order and a notice containing information regarding the reduction with ACRA. ACRA will then approve your request to make changes to the shareholding of your company, subject to some checks.
Court-approved capital reductions are difficult to challenge by your creditors due to its finality. The decision of the court cannot be challenged easily by your creditors based on unfairness. However, court-approved methods are generally slower and will cost you more as you will have to pay court processing fees.
Reducing capital without the need for court approval
You can also reduce the capital of your company without the need to obtain court approval. To achieve this, the shareholders of your company must pass a special resolution. If required, the board of directors will need to make a solvency statement. Finally, your company must comply with the publicity requirements to qualify for this method.
Non-court-approved capital reduction is much simpler, faster and less costly. However, this type of capital reduction requires additional steps such as the preparation of solvency statement and publicity requirements which may not be easy to complete for companies.
Is it a better way to reduce the Capital to solve the cash flow issue?
If you are having cash flow issues, you must evaluate whether these issues are long-term or short-term. If your issues are short-term, then it is better to solve your cash flow issues rather than reduce your capital. However, if your issues are long-term or your company constantly suffers from cash flow issues or cash shortage, then reducing your capital can be an option to solve the cash flow issues of your company.
How capital reduction would help increase the cash flow or fix up the cash flow problem?
Reduction of capital increases the distributable reserves of a company. These reserves can be treated as realized profits for accounting purposes. This is one of the main reasons why companies reduce their capital. However, you may be more interested in the cash flow related solutions of reduction of capital. If your company has cash flow problems, then capital reduction can also help you.
If your company has a high number of outstanding share capital, then you will have to pay more dividends to your shareholders. Simply put, the more the number of shares you have issued, the more dividends you have to pay to your shareholders. Equity is the costliest source of finance for any company due to this reason.
When you reduce your share capital, you don’t have to pay any dividends on the reduced capital. This can help you greatly in reducing your cash outflows due to the payment of dividends. This can help you ensure the sufficiency of distributable funds in your company and help you maintain a sustainable cash flow structure.
What would happen after reduction of capital?
Once your reduction of capital has been approved, you will have to repay your shareholders for their shares and they will surrender these shares back to your company. For fully paid share capital, the full market value of the share will have to be repaid to the shareholder. However, for unpaid share capital, the shareholders will be paid nothing and their subscription will be cancelled. If they have made part payments for the shares, then they will be paid the part payment amount they have made.
Should the company have sufficient monies to return the shareholders after capital reduction?
If you want to reduce your share capital, then you will have to repay your shareholders for their shares. While it is important for your company to have sufficient monies to pay them back, you can also use other methods to raise monies if you don’t have sufficient monies.
For example, if you don’t have enough cash to repay your shareholders, then you can generate cash by selling capital assets. Similarly, you can generate cash by effective working capital management. This means you have to carefully manage your current assets, such as inventories or accounts receivable and your current liabilities, such as accounts payable to generate cash.
How can we help you?
We, at ACHI, provide a wide range of corporate, secretarial and recruitment services in Singapore, only corporate services overseas and offshore. We can help you reduce your capital without the need for court approval. For more information, visit www.achibiz.com.
When it comes to capital reduction, you have two options. You can either choose to have a court-approved capital reduction or you can do it without obtaining the approval of the court. Both methods have their advantages and disadvantages, but ultimately, you will have to choose which one suits your needs. If you need more information related to the reduction of capital, you can ask us directly.