2 Easy Ways to Reduce Share Capital for Companies in Singapore

Increasing share capital is easy – just invest more money and your company’s equity will increase. Reducing a company’s share capital, on the other hand, takes a little more work. We explain how to reduce your share capital in Singapore.

Types of company share capital that can be reduced

There are 2 types of share capital that can be reduced:

• Paid-up share capital
• Unpaid share capital

Paid-up share capital:

This refers to shares that have been fully paid for by the shareholder.

Unpaid share capital:

This refers to shares which has been partially paid for, not paid for at all. The shareholder is going to pay for the shares in the future.

Why would a company reduce its share capital?

A company may simply wish to return surplus capital to shareholders which it no longer requires.

A company which does not have distributable profits may be keen to reduce its capital if it cannot afford to pay any future dividends.

A company may also conduct a capital reduction in order to reorganise, simplify and improve its capital structure. Changing a company’s capital structure may allow a company to engage in greater debt financing, which in turn increases leverage and potentially the company’s growth rate.

Reducing share capital helps ensure the sufficiency of distributable funds to maintain sustainable dividend payments. This is because where there are less shares, less dividends are expected to be declared.

How do you reduce your company’s share capital?

There are 2 methods you can use to reduce share capital:

• Method 1: Court-approved share reduction
• Method 2: Non-court-approved share reduction

Under both methods, the Accounting and Corporate Regulatory Authority (ACRA) does not require any fees to be paid for the entire process.

Method 1: Court-approved share reduction

The first method involves passing a special resolution on reducing your share capital, and then sending it for approval by a judge. A special resolution is basically a shareholder vote where at least 75% of shareholders must agree.

Here’s the steps required:

Step 1:

Prepare a written special resolution outlining your intent to reduce your company’s share capital. Call for a shareholder’s meeting. The date for the shareholder’s meeting must be set at least 21 days in advance, since this is a special resolution. However, if at least 95% of shareholders agree, you don’t need to set the meeting 21 days in advance and you can hold the meeting earlier.

Step 2:

At the shareholder meeting, hold a vote. At least 75% of shareholders must agree with the special resolution for it to be passed.

Step 3:

Send ACRA a notice stating that the special resolution has been passed.

Step 4:

If your company has creditors (i.e. people or organisations that it owes money to), you must prepare evidence to show the Court that you’ve protected creditors’ interests. You can contact your creditors to give you their consent to reducing your share capital. Alternatively, you can take measures to secure creditors’ debts, like show the Court that you have sufficient assets to repay creditors even if the company was liquidated.

Step 5:

Send the special resolution and evidence of creditor security for confirmation by the Court.

Step 6:

Send ACRA the Court approval. Also, send ACRA the information on the share reduction within 90 days of the Court’s approval.

Method 2: Reducing capital without the approval of the Court

Step 1:

Have the Board of Directors prepare a solvency statement. The solvency statement is a declaration that the company is able to repay its debts in the next 12 months, even if it is liquidated. It is also a declaration that the company’s assets are not worth less than the company’s liabilities/debts. The solvency statement must be made at least 20 days before the date of the special resolution.

Also, prepare a written special resolution outlining your intent to reduce your company’s share capital.

The special resolution and the solvency statement must be uploaded to ACRA, so that it is disclosed to the public. Yes – the general public, not just shareholders.

The following documents must be filed with ACRA:

• Copy of the written special resolution for reducing share capital
• Date on which the special resolution was held
• Details about the share reduction (e.g. amount of reduction)

Step 2:

Call for a shareholder’s meeting. The date for the shareholder’s meeting must be set at least 21 days in advance, since this is a special resolution. However, if at least 95% of shareholders agree, you don’t need to set the meeting 21 days in advance and you can hold the meeting earlier.

Step 3:

At the shareholder meeting, hold a vote. At least 75% of shareholders must agree with the special resolution for it to be passed.

Step 4:

Send ACRA a notice stating that the special resolution has been passed.

Things to note when preparing a solvency statement:

The Board Directors must be very diligent when preparing solvency statements. They should engage professional accountants and financial professionals (if they do not have the requisite skill set) to thoroughly evaluate the company’s financial position. Under Section 7(A) of the Companies Act, it is a criminal offence for a Board Director to issue a solvency statement without proper financial justification. Directors who flout this rule can be imprisoned up to 3 years, and/or fined up to $100,000. Those are might heavy penalties, so tread carefully!

Can creditors block a reduction of share capital?

Yes. If your company owes money to other parties, they can object to your reduction of capital. Creditors can apply to the Singapore Courts to challenge the company’s application for a non-court approved capital reduction. Creditors are allowed to do this within 6 weeks of the company passing the share reduction resolution.

The Court will step in to stop your share reduction if:

• You owe money to another party and haven’t paid them in full, or you haven’t come to an agreement to a repayment plan, and
• There is a reasonable case to secure the money that you owe as a company’s assets will decrease after a share capital reduction

What must I do if creditors object to my reduction of share capital?

If creditors raise objections to share reduction, companies must notify ACRA of the objections ASAP.

You must also apply to the Courts to dismiss the creditor’s objections. If the Court grants a dismissal, then you must file:

• Solvency statement
• Statement from the directors that all creditor objections have been dismissed
• Court order dismissing the objection
• Public notice containing the reduction information

You must do the above within 15 days of the Court dismissing the creditor’s objections.

Is the court-approved or non-court-approved method better?

If your company has no creditors, is small and has few shareholders, then you can consider going the non-court-approved route. It’s cheaper and faster. This is usually done for one or two-man companies or small family businesses, with 0 debt.

However, generally speaking, most companies will choose the court-approved method for reducing their shares. This is because the Court’s judgement gives more legal assurance to the share reduction. A Court approval makes it more difficult for creditors to challenge a share reduction.

Also, since the Directors do not need to prepare a solvency statement, there is less risk of legal liability. With the preparation of a solvency statement, Directors may open themselves up to litigation from creditors, shareholders, or other parties. If you’re going the route of non-court-approved, strongly consider Directors & Officers Liability (D&O) Insurance. This will cover your company’s directors against lawsuits and the cost of damages/settlements if they get into legal trouble.

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