Distributable reserves check

In company law, a statutory demerger is a distribution: the company is giving shareholders a business or the shares of a subsidiary. A company can only make distributions out of profits available for the purpose, so it needs distributable reserves at least equal to the book value of what it's distributing. Without them, the distribution would be unlawful.

Broadly, a company's accumulated realised profits, less its accumulated realised losses, as shown in its accounts. Share capital and share premium are not distributable. Unrealised gains, such as revaluation surpluses on property, are generally not distributable either, although there are special rules when assets are distributed in specie.

When a company distributes an asset in specie, company law generally measures the distribution by the asset's book value in the accounts, not its market value. So a subsidiary carried at a low cost can often be distributed with modest reserves. This is a simplification and the detailed rules should be checked.

There are options. Subsidiaries can sometimes pay dividends up to the parent to increase its reserves. Alternatively, a capital reduction demerger doesn't rely on existing reserves, because reducing the share capital creates a reserve that can support the demerger. Which works best depends on the group.

A private company can reduce its share capital by special resolution supported by a directors' solvency statement, under sections 641 to 644 of the Companies Act 2006. The amount of the reduction can then be used to support the transfer of the business being separated. A new holding company is often inserted first, so its share capital reflects the group's value.

It's a statement by all the directors that the company can pay its debts now and will be able to for the next 12 months. Directors who make one without reasonable grounds can commit a criminal offence, so the company's position needs to be reviewed carefully before a capital reduction.

Yes. Reserves are assessed company by company, not across the group. Profits sitting in a subsidiary don't help the parent until they're paid up as a dividend. That's a common reason a group that looks profitable still needs planning before a statutory demerger.

Usually the distribution is justified by reference to the company's last annual accounts. Where those don't show enough reserves, or circumstances have changed, interim accounts may be needed. Your accountant can confirm which accounts to use.

No. It's a simplified company law sense check to show whether reserves are likely to be an issue and how the routes compare. The rules on distributions have nuances, and the directors must be satisfied the company stays solvent. We'll review the position properly with your accountant.

No. The check runs in your browser and nothing you enter is stored or sent to us. If you'd like us to look at it with you, get in touch and we'll respond the same working day.