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  • Writer's pictureDADLAW

REDUCTION OF THE SHARE CAPITAL OF THE COMPANY


The Share capital

A company's share capital is the money that shareholders invest in order to start or expand the business.

-The authorised capital of a company is the maximum amount of share capital that the

company is authorised by its constitutional documents to issue to shareholders.

Part of the authorised capital can remain unissued.

The authorised capital can be changed with the shareholders' approval.

-The issued share capital is the number of shares that have been issued to and held by the shareholders.


Ways of reducing the share capital of the company


Sections 64 to 68 of the Companies Law (Cap 113) govern the reduction of share capital in Cyprus companies.

When reducing its share capital, a company by special resolution of the shareholders may decide to:

  • extinguish or reduce the liability on any of its shares in respect of share capital not paid up;

  • cancel any paid-up share capital which is lost or unrepresented by available assets with or without extinguishing or reducing the liability on any of its shares;

  • pay off any paid-up share capital which is in excess of the wants of the company with or without extinguishing or reducing the liability on any of its shares;

  • cancel paid-up share capital for the purpose of writing off the company's losses; or

  • cancel paid-up share capital by the creation of a reserve, to be called 'the capital reduction reserve fund', which will be subject to the same treatment as the share premium account.


Procedure for reduction of share capital


A reduction of share capital, share premium or any other non-refundable reserve:

-must be permitted by the company’s articles of association;

-requires the adoption of a special resolution of the company’s shareholders;

-requires a court order approving the reduction of the share capital following a petition filed by the company.

In case of success, a copy of the court order in addition to a copy of the special resolution must be submitted to the Registrar of Companies.


The Court applications


Application 1 (by summons)

A. The application for the reduction of the company’s share capital must:

-point explicitly to the specific provisions in the Articles of Associations permitting the reduction;

- include the shareholders’ special resolution;

-mention the reasons for the requested reduction.

B. The court application must be supported by an affidavit sworn by one of the company’s officers and the following documents are expected to be attached as exhibits:

  • Certificate of Incorporation of the Company;

  • Memorandum and Articles of Association;

  • Special Resolution approving the reduction of capital, including any relevant notices;

  • Tre copy of the Special Resolution approving the reduction of capital;

  • Consents of the creditors to the proposed reduction of share capital or proof that the debt has been repaid and/or secured etc;

  • Auditors’ declaration for confirmation of the company’s creditor/s.


Application 2 (petition)

A second application accompanied by an affidavit sworn by one of the company’s officers without attaching any exhibits, is filed petitioning the court to fix a date for a hearing of the first application as well as to give directions regarding the publishing (if applicable) of the order.


It is noted that the second application must be filed on the same day as the first application, and both applications must be set for a hearing on the same time and date.

Both applications must be thereafter served to the Registrar who may chose to appear in court to object to the issuance of the order requested.


Evaluation of the application for share capital reduction by the court


What do the courts look for when evaluating applications for a reduction of share capital?

The courts acting as a gatekeeper for other company stakeholders, exercise their legislative power in approving the application to reduce share capital or not. At the core of the courts' concern is the legitimacy of the reduction, i.e. is the intention for reduction truly based on commercial grounds or is it a concealed attempt to strip a company of its assets?


Article 66 of the Companies Law provides that the courts may insist on the company adding the phrase ‘’and reduced’’ to its name or publishing an explanation of the reduction. In reaching its decision on whether to approve a reduction of capital, the courts have been held to consider, among other things, whether:

  • all shareholders have been treated equitably;

  • the reduction proposals have been properly explained;

  • creditors' or third parties' interests have not been prejudiced; and

  • the reduction has a discernible purpose.

In reaching their decision, the courts may consider whether there are alternative ways for the protection of the creditors, such as:

-the provision of third-party guarantees;

- the appropriation of cash in an account dedicated specifically to the payment of those creditors;

-the subordination of the claims of consenting creditors to those of non-consenting creditors.


Effectiveness of share capital reduction


Once the court issues the order for the reduction of share capital, a copy of the court's order approving the reduction along with a copy of the Special Resolution for the reduction (both in greek and in english accompanied by an affidavit for translation in case the company has a translation file) must be filed with the Registrar for registration.

The registration of the court's order after its issuance and its recordal by the Registrar is a vital step in the procedure for the reduction of share capital of a company as:

  • the reduction is effective only after the court order and the attached resolution for reduction are both filed with the Registrar.

  • the certificate issued by the Registrar constitutes conclusive evidence that all legal requirements pertaining to the reduction of share capital have been complied with and that the company's share capital is as it is represented in the corresponding certificate.

Liability


Following the reduction of share capital, shareholders cease to be liable for calls or other contributions as regards the amount by which the nominal amount of their shares has been reduced.






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