October 29th, 2012 / Insight posted in

Simple ways to buy back shares

JL writes: I own 100% of a small specialist trading company. Earlier this year we were running out of cash due to a large customer of ours not paying. As a result, I used personal funds to support the company. At the time I issued new B shares for the cash that I injected rather than leaving it as a simple loan. The company’s cash position has now reverted back to normal and there is sufficient cash to repay the money. Is this possible, even though I issued new shares?

Technically, it is possible for the company to repurchase the B shares that were issued, writes Chris Lane, a partner at Kingston Smith LLP. The Companies Act allows for companies to buy back their own shares with just some basic paperwork. The company will need to pass a resolution to buy back the shares and complete a couple of forms. Form SH03 deals with the buy back and form SH06 then cancels the shares bought back. They both need to be filed with Companies House. Ideally, there should also be a formal agreement between you and the company setting out the price and terms.

I presume that you intend to withdraw the same amount that you invested in the company last year. Even though the transaction may be for the same amount that you invested in the summer, technically you are making a disposal of shares between connected parties so you will need to look at the capital gains tax position. Depending on the rights attached to these B shares the deemed market value may not have changed significantly. Of course, you will still hold 100% of the company in the original shareholding.

Generally, where you have short-term funding problems, it is simpler to inject the cash into the business as a shareholder/director loan or even a redeemable preference share. In due course and if necessary, this can be converted into ordinary share capital to strengthen the company’s balance sheet.