2.4 Reduction of share value

Co-operatives UK Model Rules include a provision for the reduction of share value which are consistent with the Co-operative and Community Benefit Societies Act 2014. Current wording as follows:

“If the Society’s Auditors (or any independent qualified accountants appointed for this purpose by the Board) certify at any time that the aggregate of the Society's liabilities plus the amount of its issued share capital exceeds its assets, then (unless in the meantime the excess has been removed) the Board may determine that the amount of this excess, or part of it, shall be apportioned among the Members in proportion to (but not beyond) the amount of the nominal value of the shares paid up and held by each Member. 

This apportionment shall be based on the value of the shares paid up and held by each Member at the close of business on the date of such determination. The value of shares held by each Member shall be reduced accordingly, provided that the value of shares held by any Member shall not be reduced below the minimum shareholding as specified in these Rules.”

In practice this means that if the value of the Society’s liabilities exceeds the value of its assets plus all the share capital issued, a formal business valuation should be conducted either by the Society’s Auditors or any independent qualified accountants appointed by the Board for this purpose. The outcome of the valuation could lead to a reduction in share value that will be shared amongst the Members in proportion to the amount of value of the shares held by each Member. 

This could mean that the Members do not have any recourse to their shares. It is also a provision of the rule that any reduction does not result in any member holding below the minimum shareholding as specified by these Rules. Those members holding only the minimum shareholding (e.g. £1) would not be affected by the reduction.

In practice, many societies do not write down the value of their share capital unless they are in the process of intentionally winding up and wish to equitably return share capital to members. Most societies will instead in times of hardship suspend withdrawals of capital while working on a business recovery plan to rebuild the value of the business and therefore the share capital. 

In the accounts any reduction in share value should be dealt with in the Statement of Changes in Equity. The reduction of share capital should be shown as a transfer from share capital to the revenue account and reflected in the balance sheet accordingly. 

If the value of a society’s liabilities exceeds the value of its assets, then the society is at risk of insolvency and must take immediate action to address this. Further advice and guidance on this can be found in the ‘Societies facing financial strife’ guidance.