Out-of-court capital reductions

On 1 January 2026, the Cayman Islands Companies Act (2026 Revision) (the “Act”) was enhanced by a series of business-friendly amendments. These changes included the introduction of a new procedure enabling solvent companies to implement a share capital reduction without the time and expense of seeking court approval.

This article explains the requirements and steps of the “out-of-court” procedure for capital reductions set out in sections 14A and 14B of the Act, including general guidance on the applicable solvency test.

Overview

A company may want to reduce its share capital for a wide variety of reasons. These include reducing par value to enable future share issuances, creating distributable reserves, eliminating accumulated losses to enable the payment of dividends, and supporting broader capital reorganisation. For NASDAQ-listed Cayman Islands companies, a capital reduction is often used to restore the ability of the company to issue shares below the current par value, after a decline in market value. For companies listed in Hong Kong, a key motivation for the capital reduction mechanism is to create distributable reserves. In both markets, compliance with listing rule requirements frequently drives the need to reduce capital. A capital reduction may also form part of a broader reorganisation involving other corporate actions such as a reverse stock split or share consolidation.

In some circumstances, a company may still prefer to reduce its capital with court approval, which remains an option under the Act, because court confirmation can provide additional comfort to directors and public markets. However, for straightforward reductions where speed is paramount, the new out-of-court procedure is proving to be the favoured option.

The essential requirements of the out-of-court procedure are a special resolution of the shareholders and a solvency statement made by the directors. A company’s articles of association may impose additional requirements that must be met.

The ways in which a Cayman Islands company can reduce its capital remain broad, as the Act provides that a company can reduce its share capital “in any way”. Without limiting this broad power, the Act contemplates that a reduction in share capital may include the following:

• extinguishing or reducing the liability on any of a company’s shares in respect of share capital not paid up;
• cancelling any paid-up share capital which is lost or unrepresented by available assets; or
• paying off any paid-up share capital which is in excess of the needs of the company.

As an aside, capital reductions pursuant to sections 14, 14A, 14B and 15 of the Act are distinct from repurchases or redemptions of fully-paid shares made pursuant to section 37 of the Act. A repurchase or redemption of shares under section 37 is a separate procedure, and is limited to situations where there are profits, funds in the share premium account, proceeds of a fresh issue of shares, and in some cases, capital, available to pay for the shares. A section 37 transaction does not alter the authorised share capital of a company.

Under the out-of-court capital reduction option, a solvency statement must be made by all of the directors of the company no more than 30 days before the date on which the special resolution for reducing share capital is passed. The solvency test is a cash-flow test. What this means and how the directors can assess it, is explained in general terms below.

Within 15 days after the special resolution approving the capital reduction is passed, a company must file the solvency statement and a minute showing: (i) the amount of share capital of the company; (ii) the number of shares into which the share capital is to be divided and the amount of each share; and (iii) the amount, if any, deemed to be paid up on each share. If the filing is not made within 15 days after the passing of the special resolution, the Registrar will not register the capital reduction. The company may then apply to the Court for an order confirming the reduction.

The Registrar, on receipt of these documents within the 15 day filing window, will register the solvency statement, issue a certificate confirming the registration and publish a notice in the Gazette. The certificate is conclusive evidence that all requirements of the Act with respect to the capital reduction have been complied with and that the share capital of the company is as stated in the filed minute. This provides a shield against subsequent claims by third parties, including creditors, regarding the validity of the capital reduction. When registered, the minute is deemed to be substituted for the section of the company’s memorandum of association that sets out the company’s authorised share capital.

Importantly, the special resolution for reducing share capital takes effect when the Registrar registers the solvency statement and the minute. It does not take effect at the extraordinary general meeting at which the special resolution is passed. This differs from other Cayman Islands corporate amendments, including amendments to the articles of association, which take effect when the relevant special resolution is passed.

Solvency test

The operative test for the out-of-court procedure is a cash flow solvency test. The directors must have reasonable grounds to believe that the company will be able to pay its debts in full as they fall due in the ordinary course of business. This is sometimes referred to as “commercial solvency”. It focuses on a company’s prospective ability to meet its obligations as and when they become payable, looking forward over an appropriate future period in the ordinary course of business rather than merely at the date of the resolution.

The solvency statement must be made by all directors of the company and must be in the prescribed form. It must state that a full enquiry into the company’s affairs has been made and that, to the best of the directors’ knowledge and belief, the company will be able to pay its debts as they fall due in the ordinary course of business commencing on the date of the statement. Under section 14A(2), any director who knowingly makes a solvency statement without reasonable grounds to believe that the company will be able to pay its debts in full as they fall due in the ordinary course of business commits an offence and is liable on summary conviction to a fine of $10,000 and to imprisonment for two years.

For the purposes of a cash flow solvency assessment, the relevant resources are not limited to cash held by the company. The assessment should take into account the company’s overall liquidity position, including cash and other assets that can be readily realised in time to meet liabilities as they fall due.

Notably, there is no separate “balance sheet” limb to the solvency test. That is, the test does not expressly require the directors to confirm that the value of the company’s assets exceeds its liabilities, including contingent and prospective liabilities. The test is framed solely by reference to a company’s ability to pay its debts as they fall due. This is narrower than the two-limb approach adopted in certain other jurisdictions. However, directors should be aware that a company’s balance sheet position will often be relevant as a practical matter in forming a view on cash flow solvency. For example, a company whose liabilities substantially exceed its assets may face difficulties satisfying creditors as debts mature.In considering the solvency test, directors should bear in mind the following:

• Directors should ensure they have access to up-to-date financial information, including management accounts, cash flow projections, details of contingent liabilities, and relevant valuations, before signing a solvency statement. A documented record of the enquiry process and the basis for the directors’ opinion is strongly advisable.
• The cash flow test looks forward in time, requiring directors to consider the company’s ability to pay debts that will become due in the foreseeable future, not only those presently payable. Directors should give careful thought to the appropriate time horizon for their assessment.
• Although the solvency test does not include a separate balance sheet limb, directors should still consider the company’s overall financial position, including the realisable value of its assets and any contingent or prospective liabilities, as these will inform the cash flow solvency assessment. A company with a materially impaired balance sheet may struggle to meet debts as they fall due.

Conclusion

Capital reduction by the traditional court-sanctioned process will remain a useful option where appropriate. For companies that can avail themselves of the out-of-court procedure, it offers significant time and cost savings. Indeed, since it became available in January 2026, the out-of-court capital reduction procedure has been utilised by many Cayman Islands companies, including those listed in Hong Kong and the United States.

Please contact a member of the Campbells team with any questions.