12.6.18 (Reduction of Share Capital without the Sanction of the Court)

There are some cases in which there is reduction of share capital and no confirmation by the Court is necessary. These are:

            (i) Forfeiture of shares. A company may, in pursuance of its articles, forfeit shares for non-payment of calls.

            (ii) Surrender of shares. It is a shortcut to forfeiture. It may be accepted by the company under circumstances where its forfeiture is justified. It has the effect of releasing the shareholder whose surrender is accepted from liability on shares.

            (iii) Diminution of capital. This has already been explained. Section 94 clearly states that diminution of capital does not amount to reduction of capital.

            (iv) Redemption of redeemable preference shares. This has already been explained as provided by s.80.

            (v) Purchase of shares of a member by the company under s. 402. The Company Law Board may order the purchase of shares of any member of the company by the company, under certain circumstances.

Reduction of capital vs. diminution of capital. Reduction of capital involves working off past losses against capital cancellation of the uncalled capital or repayment of surplus capital. It may involve reduction of issued capital, subscribed or paid up share capital. Diminution of capital denotes cancellation of the authorised or issued capital (but not subscribed). Diminution of capital does not constitute a reduction of capital within the meaning of the Companies Act. The distinction between reduction and diminution of capital is as follows:

            1. Diminution of capital is the reduction of the issued capital. Reduction of capital involves reduction of subscribed or paid up capital; there is no reduction of issued capital.

            2. Both require authorisation by Articles but whereas 'diminution' can be effected by an ordinary resolution (if so authorised by Articles), reduction of capital cannot be effected without passing a special resolution.

            3. 'Reduction' requires confirmation by Court (s.100) but ‘diminution’ needs no confirmation by the Court (s.94).

 
            4. In case of 'reduction', Court may order the company to add the words ‘and reduced' after its name [s.102 (3) but no such order can be passed in case of 'diminution' s.94].

            5. In case of 'diminution', notice is to be given to Registrar within 30 days from the date of cancellation whereupon the Registrar shall record the notice and make the necessary alteration in the Memorandum of Association and Articles of Association. In case of 'reduction' more detailed procedure has been prescribed though there is no time limit as in case of 'diminution'.