PHILIP A BECK MA ACA MABRP
Licensed Insolvency Practitioner
41 Kingston Street, Cambridge CB1 2NU
Tel: 0800 1953605 (Free call) or 01223 367022
Fax: 0844 5048737
What are undistributable
reserves and what can be done about them ?
A fundamental principle of UK company law, the preservation of
capital, makes illegal the payment of dividends outside liquidation from a
company's share capital or undistributable reserves.
If a company is in formal liquidation, this will not apply, as
liquidation is the formal process for bringing a company to an end and
distributing its assets completely. Consideration of share capital and
undistributable reserves only needs to be undertaken where the directors are
winding the company up informally without a liquidation.
Share capital is the nominal amount that has been paid upon issue
for a company's shares. In the event that shares have been sold for
amounts in excess of their nominal value, the excess will be taken to the share
Undistributable reserves are defined as:
i) the share premium account,
ii) the capital redemption reserve,
iii) the amount by which the company's accumulated unrealised
and uncapitalised profits exceed its accumulated unrealised
losses not written off, and
iv) any other reserves which the company is prohibited from
distributing by statute or its Memorandum or Articles.
The amount of share capital, and reserves i and ii above should
be shown in the company's statutory accounts, reserves iii and iv above may be
shown or the company's accountants can calculate and advise upon the extent
Now, as it's technically illegal, the company cannot distribute
its share capital and undistributable reserves in an informal winding-up,
therefore these reserves will remain, and if the distribution is made, the other
side of the equation is a debtor owed by the company's shareholders to the
company and equivalent in value.
Upon dissolution of the company, any remaining assets of the
company pass to the crown as Bona vacantia .
The Treasury Solicitor used to have a limit of £4,000 distribution of share
capital or undistributable reserves in an informal winding-up, distributions
beyond that level would mean they could attempt to recover any distributions
made above this limit. On 14 October 2011, the Treasury Solicitor
solicitor advised though that it would no longer seek to recover distributions
of share capital of any amount, due to the simplicity under the Companies Act
2006 of applying to reduce a company's share capital.
Before the Companies Act 2006, companies had to apply to the
Court for an order to reduce the share capital. While this route is still
available, the Companies Act 2006 now allows for private limited companies (not
PLCs) to reduce their share capital by passing a special resolution and filing
this at Companies House together with a solvency statement and statement of
capital. The section of the Companies Act dealing with reduction of
capital is shown
Philip Beck is a Chartered Accountant and Licensed Insolvency
Practitioner operating since 1996 with substantial experience in undertaking
liquidation, both solvent and insolvent.