Hi
I just wondered if someone could help. A new client has recently formed a company. There are 5,000 fully paid up ordinary £1 shares. He wants to take the £5k back out but I don't think he can do this - certainly not as a dividend (and that wouldn't be advisable anyway). Any reason why he can't take it out as a directors loan?
Many thanks
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Replies (7)
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Taking the cash out as a loan will not of course be “extracting share capital”, which will remain unchanged at £5,000. It will simply be borrowing the company's surplus cash.
He could use the reduction of capital procedures in s. 641 et seq of CA2006 to repay up to £4,999 if he wanted. Or the company could buy some shares back using s. 690 et seq.
If the company is solvent...
... it can use the capital reduction procedure to repay the share capital (subject to having at least one non-redeemable share), provided that the articles permit it.
Alternatively (and again if the articles permit) the company can repay any amounts paid up on the shares in excess of the amount called on those shares. In that situation though the shareholder remains liable to contribute the uncalled amount in the event of an insolvent liquidation.
Taking the money back out as a loan will give rise to a s. 455 liability, and doesn't really make sense.
EDIT: Oops! Wandered off mid-post and crossed with TerryD, although it's possible to reduce the capital to less than £1 if the shares are subdivided to say 5,000,000 x 0.01p. ;)
Thank you for your comments Basil.
I am advised that the reason for the £5000 share capital is that it was split £3.2k to the main director and £1.8k to the wife who is the marketing manager. (A genuine part-time role for her). The share split is for tax planning purposes and to give it more credibility - they each paid for their own shares.
However, I believe that any loan will be temporary and certainly paid back within 9 months of the year end. I think on that basis everything will be ok from that perspective.
The split doesn't explain the £5k share capital
The same could have been achieved with, for instance, 32 and 18 1p shares.