Permissible Capital Payment

A permissible capital payment is the amount a UK private company may pay from capital toward redeeming or purchasing its own shares after applying the available profits and qualifying fresh-issue proceeds required by the Companies Act 2006 procedure. It is a specific statutory amount, not a general synonym for a buyback payment.

Key Takeaways

• The concept belongs to the UK private-company payment-out-of-capital framework.
• It applies only after the statutory sources of available profits and fresh-issue proceeds are determined and applied.
• The permissible amount is tied to the redemption or purchase price, not simply to nominal share capital.
• Directors, auditors, members, creditors, notices, documents, and timing all form part of the procedure.
• A lawful capital payment does not prove the company has adequate liquidity or that the repurchase creates value.
• The capital redemption reserve and accounting consequences are separate calculations.

Statutory Formula

Section 710 of the Companies Act 2006 defines the permissible capital payment as the amount required to meet the redemption or purchase price after applying available profits and the proceeds of a fresh issue made for that purpose.

In simplified form:

The result cannot be interpreted without the statutory definitions and relevant accounts. Sections 711 and 712 govern the available-profits concept and its determination for this procedure.

Worked Example

A UK private company proposes to purchase fully paid shares for GBP 300,000. For this transaction, the statutory calculation identifies GBP 90,000 of available profits and GBP 60,000 of qualifying fresh-issue proceeds to apply.

The company still pays a total price of GBP 300,000. The permissible capital payment identifies the portion met through the Chapter 5 capital route. It does not mean only GBP 150,000 of cash leaves the company.

What the Procedure Is Designed to Address

Paying for an own-share purchase from capital can reduce the capital base that company law protects from ordinary distributions. The procedure therefore requires more than a board decision or solvency ratio.

The Companies Act framework includes:

• a private-company power subject to the articles;
• determination of the permissible capital payment from relevant accounts;
• a directors’ statement based on inquiry into the company’s affairs;
• an auditor’s report addressing specified statutory matters;
• member approval by the required resolution;
• disclosure, public notice, and document-availability requirements;
• a period in which eligible members or creditors may apply to court; and
• restrictions on when the payment may be made.

The exact sequence, form, voting rights, deadlines, and filing obligations should be checked against the legislation effective on the transaction date. A checklist summary cannot replace the complete statutory procedure.

Permissible Payment vs. Related Amounts

Confusing these amounts can produce incorrect board papers, journal entries, reserve calculations, and solvency analysis.

Worked Capital-Maintenance Comparison

Continue the example and assume the shares purchased have aggregate nominal value of GBP 80,000. The transaction price is GBP 300,000 and the permissible capital payment is GBP 150,000.

The GBP 80,000 nominal amount, GBP 150,000 permissible capital payment, and GBP 300,000 cash price answer different questions. The Capital Redemption Reserve calculation must be made under its own statutory rules; it should not be set equal to either of the other figures without analysis.

How to Review a Proposed Payment

1. Confirm that the company is private and that its articles do not prohibit or restrict the route.
2. Identify the shares, purchase or redemption terms, price, and nominal value.
3. Verify that the shares and transaction satisfy the general own-share requirements.
4. Recalculate available profits from the statutory relevant accounts.
5. Trace fresh-issue proceeds made and applied for the transaction.
6. Recalculate the permissible capital payment and total funding bridge.
7. Inspect the directors’ statement, auditor’s report, resolution, notices, and inspection records.
8. Check objections, court proceedings, payment timing, and Companies House filings.
9. Reconcile cancellation, capital redemption reserve, and statement-of-equity entries.
10. Assess cash flow, creditors, covenants, and solvency independently of procedural compliance.

Risks and Common Mistakes

• Applying the concept to a public company or non-UK entity without a corresponding rule.
• Describing the full repurchase price as the permissible capital payment.
• Treating balance-sheet cash as available profits.
• Using ordinary distributable-profit accounts without applying the Chapter 5 determination.
• Omitting fresh-issue proceeds from the calculation.
• Treating a directors’ statement as a guarantee that creditors will be paid.
• Equating the permissible capital payment with nominal capital or the capital redemption reserve.
• Ignoring notices, member or creditor challenges, timing, filings, or articles.

Related Terms

• Own Shares Purchase: UK company acquisition of its own shares under Part 18.
• Share Repurchase: Broader cross-jurisdictional buyback concept.
• Distributable Profits: Profits available for distribution under applicable law, subject here to the specific statutory determination.
• Capital Redemption Reserve: Restricted reserve arising from specified redemptions and purchases.
• Capital Reduction: Separate statutory route for reducing company capital.
• Solvency: Ability to meet obligations, which requires analysis beyond the payment formula.

FAQs

This material is educational and is not UK legal, tax, accounting, audit, corporate-secretarial, transaction, or investment advice.