Reduction of Share Capital

Under section 64 of the Companies Law, Cap 113 as amended (the “Law”), a company limited by shares or guarantee and having a share capital, may, if so authorized by its articles of association, reduce its share capital and may:

• A. extinguish or reduce the liability on any of its shares in respect of share capital not paid up; or
• B. 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
• C. 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
• D. cancel any paid up share capital which was paid up for the purpose of writing-off any company losses; or
• E. cancel any paid up share capital by the creation of the capital reduction reserve fund, which is treated in the same manner as the share premium account.

Procedure

The Company must carry out the following procedure in order to reduce its share capital:

1. pass a special resolution of its shareholders authorizing the reduction of the share capital. This requires a majority of at least 75% of the shareholders present and with a right to vote at the general meeting.
2. obtain creditors consent to satisfy the court that there is no need to exercise its powers for publication of the application in the official gazette to notify potential creditors and/or ask that a creditors list be prepared.
3. file an application to the relevant district court of Cyprus for approval of the reduction of share capital (details below).
4. file the resulting court order and the special resolution with the Cyprus Registrar of Companies.

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).

Court Application

The application is made to the district court where the company has its registered office and involves two applications.

The first application deals with the protection of creditors and specifically the discretion of the court to order a creditors list to be drawn up and/or the publication in the official gazette giving notice to any creditor or interested party of the hearing date of the court application enabling any such person to file an objection to the same.

The main application deals with the approval of both the actual reduction of the share capital and the special resolution authorizing the same.

Each application is supported by an affidavit sworn at court by one of the directors of the Company.

Where the company has issued shares at a premium the provisions of the Law which relate to the reduction of share capital (set out above) apply to the reduction of share premium account. The reduction of the share capital as such and share premium account may be dealt with within the same resolution and court applications and therefore resulting court order.

The procedure may take anything between two to three weeks.

Benefits of Reduction of The Share Capital

1. Allows the return of capital to the shareholders that would otherwise not be distributable.
2. The capital reduction proceeds can be used for conversion of non-distributable reserves to distributable reserves and reduce accumulated losses.
3. It may lead to the return of any surplus capital to shareholders.
4. It can facilitate the redemption or buyback of shares (in case of public company) where the company has insufficient distributable reserves.

* This publication has been prepared as a general guide and for information purposes only. It does not purport to be comprehensive or to render legal advice.