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From 1 October 2009, limited companies must comply with Part 18 of the Companies Act 2006 when purchasing their own shares. The consequences of contravention are severe, namely:

• the acquisition will be void; and
• an offence will be committed by the company and every officer in default. An officer in default is liable to a prison term of two years and an unlimited fine (or both).

Do the articles need to give express authority for a purchase of own shares?

A company limited by shares is free to purchase its own shares by a members' special resolution provided that this is not prohibited by its articles.

Funding a buyback out of capital

A company can only fund a buyback out of capital once it has exhausted available profits. Section 710 sets the ‘permissible capital payment' that can be made by a company out of capital in respect of the purchase of its own shares. The permissible capital payment can only be made after using:

• the ‘available profits' of the company; and
• the proceeds of any fresh issue of shares made for the purposes of the purchase.

Requirements for payment out of capital

A payment out of capital by a private company for the purchase of its own shares is not lawful unless:

1. A directors' statement and auditor's report is made in accordance with section 714 which specifies the amount of the permissible capital payment for the shares in question and states that immediately following the payment out of capital there will be no grounds on which the company could be found unable to pay its debts and that the company will be able to continue its business as a going concern for a year following the payment out of capital.

The auditor's report must state that he has inquired into the company's state of affairs, the amount specified as the permissible capital payment is properly determined and that he is not aware of anything that indicates that the directors opinion in their statement relating to the company's ability to pay its debts following the payment out of capital and its ability to carry on as a going concern for the year immediately following the payment out of capital is unreasonable.

2. The buyback and the payment out of capital has been approved by special resolution.

3. The public have notice of a payment out of capital within a week immediately following the date of the member's resolution approving the payment out of capital in the London Gazette.

Within the week immediately following the date of the special resolution, the company must also either have a notice in the same form as the Gazette notice published in a national newspaper or give notice in writing to each of its creditors.

4. Inspection of the directors' statement and auditor's report are allowed by any member or creditor of the company throughout the period beginning on the day on which the company first publishes the notice to the public of the payment out of capital and ending five weeks after the date of the resolution.

Items 1 and 2 set out above must be delivered to Companies House within 15 days of the passing of the resolution.

If you would like to discuss the above in more detail then please contact Catherine Doggett