CAPITAL REDUCTION BY WAY OF REDUCING SHARE CAPITAL OR SHARE PREMIUM OF A CYPRUS COMPANY LIMITED BY SHARES
It is a fundamental principle of law that a company limited by shares should only in limited circumstances reduce its share capital. This principle derives from the need to protect third parties such as creditors against the risk that the company’s assets could be transferred and/or removed depriving them of their security over the debts. In order to safeguard such risks a reduction is only feasible subject to the approval by the appropriate District Court in the Republic if certain requirements are met.
A Company registered in the Republic of Cyprus can is if so authorised by its Articles, reduce its share capital by way of special resolution to:
• Either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost or unrepresented by available assets; or
• Either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company; or
• Cancel paid up share capital for the purpose of writing off losses of the company; or
• Cancel paid up share capital by the creation of a reserve, to be called “the capital reduction reserve fund”
Reasons & Benefits for a reduction of share capital
Once a company reduces its capital the reserves arising from a reduction are treated as realised profit and are distributable immediately. This is a relatively simple way for private companies to create a distributable reserve which can be used for the following reasons:
• To eliminate a deficit on the company’s profit and loss account and thereby enable the company to pay dividends
• To return excess capital to the shareholders
• A means of paying cash to shareholders where the company does not have sufficient distributable reserves to pay a dividend.
• The capital reduction proceeds can be used for conversion of non-distributable reserves to distributable reserves and reduce accumulated losses.
• It may lead to the return of any surplus capital to shareholders
• The procedure can also be used to simplify the capital structure of the company by eliminating certain classes of shares which have no valuable rights attached to them.
A Share Capital reduction is effective subject to confirmation by the Court. The Court may require the company to show that no third parties are affected negatively by this reduction, and if so their consent shall be required. The Court may further request a publication to be made to give any third party the opportunity to file an objection to such a reduction.The procedure is mapped out as follows:
1. Passing a Shareholders special resolution approving the reduction of the share capital of the company with a right to vote majority of at least 75%.
2. If the company has creditors, such consents will have to be obtained and submitted with the court application as appendix.
3. Obtaining the courts consent and judgement.
4. Submitting relevant documents to the Registrar of Companies to finalise the reduction and obtaining relevant certificate.
Effective date of reduction of Share Capital
The reduction of the share capital will have no effect unless and until step (3) above takes place and the necessary filing is made to the Cyprus Registrar of Companies (s.67 (2) of the Law).