12.6.17 (Reduction of Capital)

Sections 100-105 provide for the reduction of share capital. A company limited by shares, if so authorised by its articles, may, by special resolution, which is to be confirmed by the Court, reduce its share capital:

            (i) by reducing or extinguishing the liability of members for uncalled capital, e.g., where a share of Rs 10 on which Rs 5 are paid, is treated as a share of Rs5 fully paid-up. In this way the shareholder is relieved from liability on the uncalled capital;

            (ii) by paying off or returning capital which is in excess of the wants of the company, e.g., where there is a share of Rs 10 fully paid-up, reduce it to Rs 5 and pay back Rs 5 to the shareholder;

            (iii) pay off paid-up capital on the understanding that it may be called up again, e.g., a share of Rs 10 is fully paid-up, on which Rs 2.50 may be returned to the shareholder on the condition that when necessary, the company may call it up again. Thus, the difference between method (i) and this method is that the uncalled liability is not extinguished in the latter;

            (iv) a combination of the preceding methods;

            (v) write off or cancel capital which has been lost or is not represented by available assets, e.g., a share of Rs 10 fully paid-up is represented by Rs 7.50 worth of assets. In such a situation, reality can be re-introduced into the balance sheet position of the company by writing off Rs 2.50 per share. This is the most common method of reduction of capital. The assets side of the balance sheet may include useless assets, fictitious goodwill, preliminary expenses, discount on issue of shares and debentures, etc. these assets are either cancelled or their values are reduced to the extent they are useless. Correspondingly, share capital on the liability side is reduced.

Procedure for reduction of capital. After passing the special resolution for the reduction of capital, the company has to apply to the Court by way of petition to confirm the resolution under s.101. The creditors are entitled to object where the proposed reduction of share capital involves either: (1) the diminution of liability in respect of unpaid capital; or (2) the payment to any shareholder of any paid-up share capital, or in any other case, if the Court so directs.

To enable the creditors to object, the Court settles a list of such people. If any creditor objects, either his consent to the proposed reduction should be obtained or he should be paid off or his payment secured. However, the Court may dispense with the consent of a creditor on the company securing payment of the debt or claim by appropriating the full amount or that fixed by the Court.

Section 102 states that if the Court is satisfied that either the creditors entitled to object have consented to the reduction, or that their debts have been paid or secured, it may confirm the reduction. It may also direct that, the words “and reduced” be added to the company’s name for a specified period and that the company must publish the reasons for the reduction and the causes which led to it.

Section 103 provides for registration of the Court’s order with the Registrar of Companies. The company has also to send the minutes giving details of the share capital as altered. The reduction of share capital takes effect only on registration of the Court’s order with the Registrar and not before. The Registrar will issue a certificate of registration which will be a conclusive evidence that both the requirements of the Act have been complied with and that the share capital is now as set out in the minutes. The registered minutes are deemed to be substituted for the corresponding capital clause in the memorandum, thereby altering the memorandum within the meaning of s.40. The copies of the memorandum which will be issued subsequently must, therefore, be in accordance with the articles.

Section 104 provides that the reduction of capital, the members cease to be liable for calls as regards the amount by which the nominal amount of their shares has been reduced. If, however, any creditor entitled to object to the reduction of share capital is not entered on the list of creditors, then every member at the time of the registration of the Court order and minutes is liable to contribute for the payment of that debt

Section 105 provides for punishment with imprisonment extending to one year or with fine or both. if any officer of the company knowingly conceals the name of any creditor entitled to object to the reduction or misrepresents the nature or amount of claim or debt or abets such concealment or misrepresentation.