A company’s share capital, the money that is injected into a company by its stakeholders, does not belong to the stakeholders but the company itself. The reason for this particular rule is in order for a business to have a cushion in paying debts to a third party. The company, its stakeholders, and creditors get comfort knowing that the company remains solvent.
An aspect of this rule is for a company to maintain a particular share capital level and not reduce the share capital unless the company carries out a certain process.
Ways in Reducing Company Capital in the UAE
There are three options that are available in order to reduce the share capital of a company. A company may choose to utilize one particular method or a combination of the available options. This will entirely depend on the unique circumstances of the company.
- Cancel or reduce members’ liability – if a business has issued shares that are partly paid, it can cancel entirely or reduce the liability of members in paying the balance for the shares;
- Cancel or reduce the paid-up company share capital – a company can cancel entirely or reduce the paid-up capital and replay capital to the stakeholders;
- Cancel or reduce paid-up company share capital to use for another purpose – a company can cancel entirely or reduce the share capital that’s paid up to apply to another purpose apart from repaying capital back to the company stakeholders
Issues with the UAE Capital Reduction Process
A company will have to put into consideration certain issues that can arise with the capital reduction process such as:
- Class rights – apart from obtaining the approval of the majority of the stakeholders of the company for the proposed share capital reduction, the company that has different classes of shares needs to make sure that the share capital reduction proposition is according to the rights that are attached to every single class. Reduction of capital in UAE that is inconsistent to capital rights that attach classes of shares would amount to variations of rights. There’s going to be a preference of shareholders that will have a priority right in repayment of capital and they’ll be asked in giving their consent with regards to repayment of share capital or the reduction of all unpaid share capital.
- Written consents – any debenture, loan stock, bank facilities, and the like are to be reviewed should consent be a requirement for the capital reduction of a company in UAE.
Reasons to Reduce Capital in the UAE
Capital reduction in UAE is often undertaken by companies in order to meet various company objectives, such as:
- Pay dividends – capital reduction allows a company to eliminate a part or all of its accumulated losses. As a company can only pay dividends from profits that are available, the accumulated losses can have a negative impact on the retained reserves of a company for profit and loss and can prevent dividends payment to shareholders. Reducing or eliminating losses through capital reduction is a company’s best route if assets value of a company decreased, if the business experienced trading losses, or if the company acquisition proved to be unsuccessful.
- To return surplus capital – companies in the UAE can have capital that’s surplus to what’s required. In such a case, they may wish in returning the surplus capital to the shareholders. In such a case, the return of capital that’s surplus can be utilized in releasing liability to settle unpaid capital or pay paid-up capital to the stakeholders. This won’t amount to the distribution of dividends.
- Redeem shares – companies can choose to redeem shares; however, they may not be able to do so when they have sufficient distributable reserves. Shares can be redeemed from the distributable profits of a company or out of proceeds from a fresh issuance of shares. When a company accumulates losses or has insufficient distributable reserves in redeeming shares plus it has no plans in making a fresh issuance of additional shares, then it may choose to undertake a capital reduction.
- Distribute assets – capital reduction in UAE is undertaken also to transfer assets that are non-cash, but this is unusual. For such, shares are canceled or the nominal value of shares is reduced. Assets would then be distributed to all shareholders. Given that all appropriate safeguards have been put in place in order to protect company creditors, asset value being distributed can exceed the amount by which company capital has been reduced.
The reduction of capital in the UAE is possible with the furnishing of the required notarized and attested legal documents and securing the approval of government authorities. It’s best to seek the advice of UAE Corporate PRO specialists. Call us here in FAR Consulting Middle East to know more about business setup in UAE today! We’d love to discuss with you how our seasoned experts can address the unique needs of your UAE-based company.