Capital redemption reserve fund

3 Key Takeaways

• A capital redemption reserve is a non-distributable reserve created when a company redeems its shares.
• It aims to protect creditors by maintaining the company’s capital base.
• The CRR can be used to issue bonus shares or be reduced through a capital reduction process.

What is a Capital Redemption Reserve Fund?

The capital redemption reserve fund is a special reserve account that a company is required to create under the UK Companies Act 2006 when it redeems or purchases its own shares. It is designed to ensure that the funds used for share redemption are not taken from profits that could otherwise be distributed to shareholders as dividends. Instead, the company must transfer an amount equal to the nominal value of the redeemed shares from distributable profits into the CRR.

Importance of the Capital Redemption Reserve Fund

• Creditor Protection: The CRR serves as a safeguard for creditors by ensuring that a company’s capital base is not diminished when shares are redeemed. This helps maintain the company’s ability to repay its debts and fulfill its financial obligations.
• Maintaining Capital: The CRR ensures that the redeemed share capital is not lost but is instead replaced with an equivalent amount in the reserve, thus preserving the company’s overall capital position.
• Flexibility: While the CRR is non-distributable to shareholders, it can be used for specific purposes, such as issuing bonus shares to existing shareholders or being reduced through a formal capital reduction process.

How Capital Redemption Reserve Funds Work

When a company redeems its shares, it must follow a specific process:

1. Authorisation: The company’s articles of association must authorize the redemption of shares.
2. Funding: The funds used for redemption must come from either distributable profits or the proceeds of a new share issue.
3. Transfer to CRR: An amount equal to the nominal value of the redeemed shares must be transferred from distributable profits to the CRR.
4. Utilization: The CRR can be used to issue bonus shares or be reduced through a capital reduction process, subject to certain conditions and approvals.

Examples of Capital Redemption Reserve Funds

• A company redeems £100,000 worth of its shares and transfers an equivalent amount from its profits to the CRR.
• The CRR is later used to issue bonus shares to existing shareholders, increasing their stake in the company.
• The company decides to reduce its share capital and uses the CRR to offset the reduction.

Real-World Application

Capital redemption reserve funds are a common feature in the financial management of companies that engage in share buybacks or redemptions. They play a crucial role in safeguarding creditors’ interests and maintaining a company’s capital base, which is essential for its financial stability and long-term sustainability.pen_sparktunesharemore_vert