Utilising the share premium account 5th July 2019 For some privately owned companies, negative profit and loss reserves means that they are unable to pay out dividends as they do not have enough distributable reserves. However, they might have a significant share premium reserve, which is a non-distributable reserve. The Companies Act 2006 allows a private company to utilise the share premium account and transfer this reserve to the profit and loss reserve, meaning it becomes distributable. In order to do this, the company needs to go through a capital reduction process. There are a few steps to go through, in summary these are: Ensure the company’s articles allow a capital reduction All directors must sign a solvency statement Shareholders must approve the capital reduction via a special resolution (needing 75% of the votes) within 15 days of the solvency statement date The special resolution must be filed with Companies House within 15 days The techy bit: example & accounting treatment A company has £1,000 cash which is surplus to requirements, which it wants to return to the shareholders. This cannot be done via a dividend as the company has negative profit and loss reserves. Balance sheet (before reduction) Share capital £1, fully paid 2,000 Share premium 500 Profit and loss reserve (150) Total reserves 2,350 The company can cancel 1,000 shares, so the nominal value £1,000 is repaid to the shareholders and cancelled. As a part of this journal entry, the company can cancel and reduce down the share premium account in any proportion it wishes. It can either reduce the whole share premium account, or just a part of it. DR Share capital 1,000 CR Cash (1,000) DR Share premium 500 CR Profit and loss reserve (500) Balance sheet (after reduction) Share capital £1, fully paid 1,000 Share premium 0 Profit and loss reserve 350 Total reserves 1,350 As can be seen, the company now has positive distributable reserves and has eliminated the share premium account in its entirety.
