The balance-sheet loss of capital trigger no PLC board can afford to miss
Could a PLC cross a statutory capital threshold without its Board realising it?
Under section 656 of the Companies Act 2006, the answer can be yes. If the PLC’s net assets fall to 50% or less of its called-up share capital, the directors must call a general meeting within a strict statutory timetable. Once the directors become aware of the position, the clock starts running – and failure to act can constitute a criminal offence.
Regular monitoring of net assets is therefore more than good financial discipline; it is an important governance control. Boards need reporting and escalation arrangements that identify a potential section 656 trigger promptly, particularly as losses, impairments or other balance-sheet movements could erode net assets. This article explains how the threshold is calculated, the steps and deadlines that follow, and the additional disclosure considerations for listed PLCs.
Note that unless specified otherwise, any reference to an Act is a reference to the Companies Act 2006.
MSP Company Secretarial can provide more expertise around significant loss of capital. Speak to our team for more information.
What is a significant loss of capital?
Section 656 of the Act sets out the obligation on directors of a PLC to call a general meeting where the Net assets of the PLC have fallen to 50% or lower of the company’s Called up share capital.
The following condition triggers the requirement for directors of a PLC to call a general meeting of shareholders:
The duty to call a general meeting of shareholders occurs once the directors become aware of the fall in capital to an amount that is equal to or less than 50% of the Called up share capital. A significant fall in Net assets to 50% (or lower) of Called up share capital represents a significant risk to shareholder funds and so shareholders need to be alerted and consulted, hence the need for directors to call a general meeting.
MSP Company Secretarial can help with calculating Called up share capital. Speak to our team to find out more.
Definition of Called up share capital
Called up share capital is defined in section 547 of the Act as: “so much of [a company’s] share capital as equals the aggregate amount of calls made on its shares (whether or not those calls have been paid), together with-
(a) any share capital paid up without being called, and
(b) any share capital to be paid on a specified future date under the articles, the terms of allotment of the relevant shares or any other arrangements for payment of those shares;
and ‘uncalled share capital’ is to be construed accordingly.”
That is, the aggregate amount of calls made on shares (whether paid or not) plus any capital paid up without being called or due to be paid on a future date.
If you are unsure what comprises your company’s Called up share capital, contact MSP.
Definition of Net assets
Net assets are “the aggregate of the company’s assets less the aggregate of its liabilities [sections 92(6) and 831(2) of the Act]… [a] public company must not include any uncalled share capital as an asset” (section 831(5) of the Act).
Statutory duty to call a general meeting
Once directors become aware that the Net assets of the PLC have fallen to 50% (or below) of the Called up share capital of the company, then:
- Within 28 days of directors becoming aware of the fall in Net assets they must convene a general meeting “for a date not later than 56 days” from the date the directors became aware of the fall in Net assets.
Section 656(4) makes it an offence where a director is aware of the significant fall in Net assets satisfying section 656(1) of the Act but does not call a general meeting.
Business of the general meeting
When it comes to the business of the general meeting, section 656 of the Act simply requires that the directors “call a general meeting of the company to consider whether any, and if so what, steps should be taken to deal with the situation.” There is no requirement for a resolution to be passed at the general meeting; it is a meeting between the directors of the PLC and the shareholders of the company to consider the significant fall in Net assets, and, if possible, agree a way forward. It makes sense for the directors to give an explanation of the circumstances that contributed to the fall in Net assets and if possible, propose a process of recovery.
Calling a general meeting
When calling a general meeting, the PLC must follow Part 13 Chapter 3 of the Act.
Traded PLCs (a company as defined in section 360C of the Act) need to comply with the notice period requirements of section 307A; that is, call a general meeting on 14 days’ clear notice only if the company has passed a special resolution at the company’s last annual general meeting (or a recent general meeting) permitting a shorter period of notice.
Points to note when giving notice of general meetings
Note that when you issue the notice for a general meeting, then you need take care when estimating the notice period required – the ‘clear day rule’ (section 360 of the Act) – you will need to:
- Set the date so the notice period DOES NOT include the date on which the notice was issued – unless your company’s articles require longer periods of notice, then the period of notice for a general meeting of a PLC is typically 14 days, but noting the comments above, for a traded PLC, the period of notice is 21 days (unless a special resolution was passed in the company’s last AGM or a more recent general meeting).
- The notice period doesn’t include the date the meeting is to be held on
- The date the notice is usually deemed as given is 48 hours after posting to account for postal delivery times (take note of your company’s articles when calculating the deemed notice period).
- So the 14- or 21-day clear notice period will require more calendar days to meet the criteria for a general meeting.
For more information on calculating clear days and the process for calling and holding a general meeting, contact us here.
Listed PLCs and significant loss of capital
A PLC calling a general meeting in compliance with section 656 will need to release a Notice of General Meeting (Part 13 Chapter 3 of the Act) outlining the section 656 condition. A listed PLC needs to respond to its obligations to disclose its newly discovered significant loss of capital promptly:
- A serious loss of capital would typically be inside information capable of having an effect on the price of a PLC’s securities and so trigger disclosure under UK MAR (Article 17).
- AIM listed companies – Rules 11 and 17:
- Rule 11 – the requirement for a company to notify the market “without delay of any new developments which are not public knowledge which, if made public, would be likely to lead to a significant movement in the price of its AIM securities concerning a change in”, amongst other things, the financial condition or business performance of the company; and
- Rule 17 – the requirement for a company to make a “notification without delay” in respect to “any material change between its actual trading performance or financial condition and any profit forecast, estimate or projection included in the admission document or otherwise made public on its behalf”.
- Main Market and AQSE listed companies where they are unable to assess their financial position accurately need to consider their position and with their advisers (eg., sponsor, corporate adviser,…) – e.g. UKLR 21.1.1 R; matters that can affect AQSE Main Market Rule 20.
Additional considerations
Naturally, a fall in Net assets giving rise to a section 656 situation is a significant change to a company’s financial position bringing into consideration a company’s going concern status and its viability position. Additionally, a directors’ duties need to be considered (Part 10 Chapter 2 of the Act). Directors owe a general duty to promote the success of the company for its members (section 172(1)), however directors need to be mindful of their duties under section 172(3) which requires directors “in certain circumstances, to consider or act in the interests of creditors of the company”.
How can MSP Company Secretarial help?
MSP Company Secretarial provides consultancy, practical support and fractional Company Secretary services. We can help by:
- Providing guidance and advice to Boards when a section 656 event is triggered
- Support the company with all elements of holding a general meeting
- Assist listed PLCs with their disclosure duties
Significant loss of capital: Frequently Asked Questions
What happens if the directors fail to call the meeting within the deadline?
Under section 656 of the Act, it is a criminal offence to knowingly permit the failure to convene the meeting within the schedule specified in section 656(2) or to allow it to happen after the deadline has passed. Directors may be personally liable in this instance.
Does a section 656 trigger mean the company is insolvent?
Note that section 656 is a capital test specific to PLCs and is a separate requirement to the requirements of the Insolvency Act. Section 656 can be trigged while the PLC is still solvent and able to pay debts as they become due.
If the loss of capital position is recovered before the general meeting takes place, is the company still required to hold it?
Once the requirement to call the general meeting has been triggered, directors have a statutory duty to convene the general meeting. The Act doesn’t address steps related to recovery of the company’s capital position, but the company’s response to a significant loss of capital should involve the participation of shareholders, despite a recovery, even if that is to endorse any actions taken.