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Replies to Queries - Bailing out

17 February 2005
Issue: 3995 / Categories:

My client is an enterprise investment scheme (EIS) company with four 25% shareholders. Three put in £1,000 each and the fourth — who was not going to be so involved in running the company — put in £27,000 for the same 25% share; so the company originally had £30,000 of share capital, with £4,000 in nominal value and £26,000 in share premium.

The company is a genuine trading vehicle, but it has made losses in its three-year EIS qualifying period and two of the original shareholders now want to leave. The major investor and one of the others want to stay.

My client is an enterprise investment scheme (EIS) company with four 25% shareholders. Three put in £1,000 each and the fourth — who was not going to be so involved in running the company — put in £27,000 for the same 25% share; so the company originally had £30,000 of share capital, with £4,000 in nominal value and £26,000 in share premium.

The company is a genuine trading vehicle, but it has made losses in its three-year EIS qualifying period and two of the original shareholders now want to leave. The major investor and one of the others want to stay.

I believe that a company purchase of own shares will leave the remaining investors as 50% shareholders, but with CGT-exempt shares as they were issued under the EIS and over three years have passed since the original issue.

I understand that it is possible for the company to buy back shares out of capital using Companies Act 1985,  s 171, but the details of the procedure are not described in any of my tax planning books.

I think that there has to be authority in the articles, proper notice and a special resolution; the directors need to make a declaration of solvency; and the auditors need to make a report. (What does a small company without auditors do; does it ask an accountant who would be qualified to be the auditor if it wanted one?).There is also supposed to be publicity in the Gazette . I think that the 'permissible capital payment' would then reduce the share capital by the £2,000 nominal value and the share premium by £2,000, and the deficit on reserves would remain the same as it was. Can any reader confirm that?

If the parties all agreed that the company would buy and cancel two of the 25% shareholdings for £2,000 each, are there any pitfalls? It would be a distribution for tax purposes (owned for less than five years), but that is not an issue.

Readers' advice would be very helpful.

(Query T16,559)        

Issue: 3995 / Categories:
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