rose to move, That the Grand Committee do report to the House that it has considered the Companies (Reduction of Share Capital) Order 2008.
The noble Baroness said: The order does two things. It sets out how the reserves arising from a reduction of capital—the cash that a company gets from reducing its share capital—may be treated, and it provides the form in which a solvency statement must be made, underpinning the new option introduced by the Companies Act for private companies to reduce their share capital without reference to a court. The treatment of reserves arises when a company, public or private, has reduced its share capital by any of the means permitted to it. The order clarifies whether the reserve is to be treated as distributable to shareholders by way of, for example, dividends.
The provisions of the order follow consultation on drafts and detailed discussions with the Institute of Chartered Accountants in England and Wales and the Law Society. The order provides that, subject to some exceptions, reserves resulting from a reduction of capital will be treated as “realised profits” for the purposes of Part 23 of the Companies Act 2006. Part 23 sets out the rules for the distribution of a company’s assets. The effect of the order is that, with certain specified exceptions, once a reserve is created, Part 23 controls its distribution. This removes the need for what is currently extensive professional guidance on the matter.
The second aspect of the order arises from the need to prescribe the form of the solvency statement that is provided for under Section 643 of the 2006 Act. This part of the Act enables private companies to rely on a solvency statement for the purpose of reducing share capital without the need to have the reduction confirmed by a court. For companies wishing to utilise the solvency statement route under the new Act, the directors must form the opinion and confirm in a statement that, at the date of the statement, there are no grounds on which the company could be found to be unable to pay its debts; that if it is intended to commence a winding-up at any time in the 12 months following the statement, the company will be able to pay its debts within 12 months of the commencement of the winding up; and that, in any other case, the company will be able to pay its debts within the year following the date of the solvency statement. The content required of the solvency statement is therefore set out in the Act. This order relates only to the form of the statement which the Act requires to be prescribed in an order.
In this order we have prescribed the most elementary requirements as to the form of a solvency statement: it must be in writing, indicate that it is a solvency statement for the purposes of Section 642 of the Companies Act 2006 and be signed by each of the company directors. I beg to move.
Moved, That the Grand Committee do report to the House that it has considered the Companies (Reduction of Share Capital) Order 2008. 22nd report from the Joint Committee on Statutory Instruments.—(Baroness Vadera.)
I thank the Minister for explaining the order. I declare an interest as a Fellow of the Institute of Chartered Accountants in England and Wales, on whose briefing I will draw in a moment. Before I do so, I should say that we strongly support anything which reduces the regulatory burden on business.
On the transitional provisions, I understand that, even after implementation of the order, a surplus which has arisen on a reduction of capital which took place before 1 October this year will not become distributable. Is there any logic for this?
I hope your Lordships will forgive me if I take this opportunity to probe the wider context of the Government’s position on the possibility of more fundamental reform of the capital maintenance and distributions regime, both at United Kingdom and EU levels. For example, it appears from a recent KPMG study into the costs of the capital maintenance regime, and the commission’s reaction thereto, that the UK has over-implemented the second directive regime, resulting in much higher costs in the UK compared to other member states. This appears to be caused by the UK’s realised profits test, which, as I understand it, is not required in other member states. Do the Government propose to consult urgently and widely, with a view to reforming these rules? If not, why not?
The interaction between IFRS or converged UK GAAP and the current capital maintenance and distribution rules can mean that the payment of dividends can become an extremely and unnecessarily complicated process. Can the Minister explain what action the Government are taking to press the EU for changes to the second directive in relation to public companies and to alleviate the problems faced by private companies?
On the issue of the date, following discussions with stakeholders we are minded to agree that the provisions on reserves arising from reductions of share capital should be applicable prospectively as from 1 October 2008, irrespective of when the capital reduction took effect. The matter will be addressed in the draft seventh commencement order, which is currently subject to public consultation. We intend to make the order before the Summer Recess.
I am aware that there is wider debate with respect to specific aspects of the capital maintenance regimes—for instance, the realisation test—and that there are arguments both for and against further legislative reforms. European Community law governs much, if not all, of this area. While we do not currently have plans to publish a consultation on the specific proposals, we are maintaining an open dialogue with interested stakeholders and are keeping this issue under review. We continue to discuss with the Commission and other member states the case for reform of the second directive, which we support.
On Question, Motion agreed to.