It may from time to time become necessary to reduce the share capital of a company, whether because the original share capital may have been lost through trading or because the company may find it has more resources than it can profitably employ, or for other reasons.

On the premise that creditors may rely on the value of a company’s issued share capital as a possible fund from which their claims may be satisfied, it is a general principle of the Companies Law that capital cannot be reduced without the consent of the Court. The Court will be concerned to ensure that the rights of the creditors are not prejudiced by a reduction and that the reduction is fair and equitable as between any different classes of shares in the capital of the company.

An application under Section 15 of the Companies Law confirming a special resolution for reducing the share capital of a company must be made by petition. Such a petition may be served out of the jurisdiction of the Cayman Islands upon any shareholder, director or creditor of the company concerned, without leave of the Court.  Upon the issue of the petition, the petitioner must at the same time take out a summons for directions, and both must simultaneously be served on the company.  On hearing of the summons for directions, the Court may by order give such directions as to the proceedings to be taken before the hearing of the petition as it thinks fit, including in particular directions for the publication of notices and the making of any inquiry.

These may include directions:

a) for an inquiry to be made as to the debts of, and claims against the company or as to any class or classes of such debts or claims; and
b) as to the proceedings to be taken for settling the list of creditors entitled to object to the reduction and fixing the date by reference to which this list is to be made.

On any hearing of the summons for directions, the Court may, if in any special circumstances it thinks it proper to do, exercise its power under Section 15(3) of the Companies Law to direct that Section 15(2) thereof (regarding settlement of lists of creditors entitled to object to the capital reduction) shall not apply as regards any class or classes of creditors.

If upon reading the petition, affidavit and written submissions, the Court is satisfied that settling a list of creditors should be dispensed with under Section 15(3) of the Companies Law or that the capital reduction is not a case in which settlement of a list of creditors pursuant to Section 15(2) thereof is required, and the materials filed do not disclose any other reason for the Court to require additional evidence or submissions, then the Court may make an order for directions without the need for a hearing.

On any consideration of the summons for directions the Court will require satisfactory evidence that:

a) the company had the power under its Articles of Association to reduce its share capital;
b) the shareholders were provided with sufficient appropriate information to enable them to make an informed decision on the capital reduction;
c) the shareholders have been and will be treated equitably;
d) a valid resolution approving the proposed capital reduction has been passed; and
e) the company’s actual and contingent creditors will be adequately protected.

Where an inquiry as to debts and claims is ordered as described above, the company must, within seven (7) days after the making of the order, file in Court an affidavit made by a competent officer of the company verifying a list containing:

a) the name and address of every creditor entitled to any debt or claim to which the inquiry extends;
b) the amount due to each creditor in respect of such debt or claim or, in the case of a debt or claim which is subject to any contingency or sounds only in damages or for some other reason does not bear a certain value, a just estimate of the value thereof; and
c) the total of those amounts and values.

The deponent must state in the affidavit his belief that at the date fixed by the Court as the date by reference to which the list is to be made, there is no debt or claim which, if that date were the commencement of the winding up of the company, would be admissible in proof against the company, other than the debts or claims set out in the list and any debts or claims to which the inquiry does not extend, and must also state his means of knowledge of the matters deposed to.

Copies of the list of creditors with the omission (unless the Court otherwise directs) of the amounts due to each creditor and the estimated value of any debt or claim to which any creditor is entitled, must be kept at the registered office of the company and at the office of the company’s attorneys.  Any person shall be entitled during ordinary business hours to inspect the list at any such office and to take extracts or copies.

Within seven days after filing the affidavit verifying the list of creditors, the company must sent by post to each creditor named in the list of creditors exhibited to the affidavit, at his last known address, a notice stating;

a) the amount of the capital reduction sought to be confirmed;
b) the effect of the Court order directing an inquiry as to debts and claims;
c) the amount or value specified in the list as due or estimated to be due to that creditor; and
d) the time fixed by the Court within which he must send particulars of any larger amount claimed and the name and address of his attorney (if any) to the company’s attorney.

After filing the affidavit verifying the list the company must insert in such newspapers and at such time as the Court directs a notice stating:

a) the date of issue of the petition and the amount of reduction thereby sought to be confirmed;
b) the inquiry as to debts and claims ordered by the Court, as described above;
c) the places where the list of creditors may be inspected; and
d) the time within which any creditor not named in the list who claims to be entitled to any debt or claim to which the inquiry extends must send his name and address, the name and address of his attorney (if any), and particulars of his debt or claim to the company’s attorney.

Within such time as the Court directs the company must file in Court a further affidavit made by a competent officer or other person;

a) proving service of the above notices to creditors and the above advertisement of the notice of petition respectively;
b)verifying a list containing the names and addresses of the persons (if any) who in pursuance of such notice sent in particulars of debts or claims, specifying the amount of each debt or claim;
distinguishing in such list those debts or claims which are: (i) wholly, or as to any and what part thereof, admitted by the company; (ii) disputed by the company; or (iii) alleged by the company to be outside the scope of the inquiry; and
c) stating which of the persons named in the list of creditors and which of the persons in the list made post-advertisement, have been paid or consent to the capital reduction sought to be confirmed.

The consent of a creditor to the capital reduction may be proved in such manner as the Court thinks sufficient.

If the company contends that a person is not entitled to be entered in the list of creditors in respect of the full amount claimed by him in respect of any debt or claim, then, unless the company is willing to secure payment of that debt or claim by appropriating the full amount of it the company must, if the Court so directs, send to that person by post at his last known address a notice requiring him;

a) within such time as may be specified in the notice to file an affidavit proving his debt or claim or, as the b) case may be, so much thereof as is not admitted by the company; and
c) to attend the adjudication of his debt or claim at the place and time specified in the notice, being the time appointed by the Court for the adjudication of debts and claims.

The list of creditors entitled to object to the capital reduction as settled by the Court under Section 15(2) of the Companies Law, shall be certified and filed and the Court’s certificate shall;

a) specify the debts or claims (if any) disallowed by the Court;
b) distinguish: (i) the debt and claims (if any) the full amount of which are admitted by the company: (ii) the debts or claims (if any) the full amount of which, though not admitted by the company, the Company is willing to appropriate; (iii) the debts or claims (if any) the amount of which have been fixed by adjudication by the Court under Section 15(2) of the Companies Law; and (iv) other debts or claims;
c) specify the amounts of debts or claims, payment of which have been secured by appropriation under Section 15(2) of the Companies Law;
d) show which creditors consent to the reduction and the total amount of their debts or claims; and
e) specify the creditors who sought to prove their debts or claims after having been notified so to do and state which of such debts or claims were allowed.

A petition for the confirmation of any such capital reduction shall not, where the Court has directed an inquiry as to debts and claims, be heard before expiration of at least eight clear days after the filing of the Certificate of the settled list of creditors. Before the hearing of the petition, a notice specifying the date appointed for the hearing must be published at such times and in such newspapers as the Court may direct.  The Court will usually require such notice to be advertised in a place or places where it is most likely to come to the attention of creditors, but may dispense with such advertisements in exceptional circumstances.

Upon being satisfied that every creditor of the company who under Section 15 of the Companies Law is entitled to object to the capital reduction has consented to it or his debt or claim has been discharged, determined or been secured, the Court may make an order confirming the reduction on such terms and conditions as it thinks fit.  The Court may, if it thinks proper so to do: (i) direct that the company shall, during such period specified in the order, add to its name the words “and reduced”; and (ii) require the company to publish the reasons for reduction or other information with a view to giving proper information to the public, and the causes which led to the reduction.

The order of the Court confirmation the reduction of the share capital and the minute approved by the Court showing the share capital as altered by the order must be registered with the Registrar of Companies, whose certificate is conclusive evidence that the reduction has been duly made. The reduction will not be operative until such registration is effected.

A redemption of shares or a repurchase of shares by the company pursuant to Section 37 of the Companies Law will not amount to a reduction of authorised share capital.

In the case of a reduction of share capital, a past or present member of the company shall not be liable in respect of any share to any call or contribution exceeding the difference (if any) between the amount of the share as fixed by the minute approved by the Court and the amount paid or the reduced amount (if any) which is to be deemed to have been paid on the shares, as the case may be.

However, if any creditor entitled in respect of any debt or claim to object to the reduction of share capital is by reason of his ignorance of the proceedings for reduction, or of their nature and effect with respect to his claim, not entered on the list of creditors, and after the reduction the company is unable to pay the amount of his debt or claim, then:–

a) every person who was a member of the Company at the effective date of the reduction shall be liable to contribute for the payment of that debt or claim an amount not exceeding the amount which he would have been liable to contribute if the company had commenced to be wound up on the day before that effective date; and

b) if the company is wound up, the Court on the application of any such unlisted creditor and proof of his ignorance as aforesaid, may if it thinks fit, settle accordingly a list of persons liable to make such contribution, and may make and enforce calls and orders on the contributories in a winding up.
This publication is intended to provide only general information for clients and contacts of Nelson & Company and does not purport to be comprehensive or to constitute legal advice.  It has not been prepared in contemplation of any particular facts and readers are cautioned not to rely on its contents without first taking specialist legal advice.

If you would like to know more please contact info@nellaw.com