Section 66 of the Companies Act, 2013 provides for the reduction of share capital. Reduction of capital involve:
- Reduction of issued capital or
- Reduction of paid up capital
Why Reduction:
The need for reduction of capital may arise in various circumstances. For example
- Losses and
- Assets of reduced or doubtful value.
- Surplus funds.
Mode of Reduction:
- By reducing uncalled or unpaid capital
- By paying off or returning the capital
- By writing off the capital which is lost or unrepresented by assets.
Procedure for reduction:
| Sr. No. | Actions |
| 1. | Convening Board Meeting for approving the scheme of reduction & to convene EGM to pass special resolution |
| 2. | Send three copies Notice of EGM to Shareholders & Stock Exchanges (if Company is listed) |
| 3. | Holding EGM |
| 4. | Send three copies of proceeding of EGM to Stock Exchanges (if Company is listed) |
| 5. | File special resolution in MGT 14 with ROC |
| 6. | Creditor’s consent |
| 7. | Apply to NCLT through in a petition for confirmation of reduction |
| 8. | Advertisement in Official Gazette & Newspaper (English & Vernacular Language) |
| 9. | NCLT to pass the order |
| 10. | File the order with ROC |
Can the company go for reduction of capital without sanction of the court?
Yes. By following methods –
- Surrender of shares
- Forfeiture of shares
- Diminution of capital
- Redemption of redeemable preference shares
- Purchase of shares of a member by the company under Section 242 due to oppression and Mismanagement.
Equal Reduction of Shares of One Class
- Where there is only one class of shares, prima facie, the same percentage should be paid off or cancelled or reduced in respect of each share,
- Where different amounts are paid-up on shares of the same class, the reduction can be effected by equalizing the amount so paid-up.
Qualification shares of directors
Where the directors are required to hold qualification shares, care must be taken to ensure that the effect of a reduction does not disqualify any director.
Procedural aspects:
Creditors’ Right to Object to Reduction
Where the proposed reduction of share capital involves either:
- diminution of liability in respect of unpaid share capital, or
- the payment to any shareholder of any paid-up share capital, or
- in any other case, if the NCLTso directs,
The following provisions shall have effect:
- The NCLT will settle a list of creditors entitled to object.
- If any creditor objects, then either his consent to the proposed reduction should be obtained or he should be paid off or his payment be secured.
POWER OF THE NCLT:
NCLT has the power to confirm the reduction except that it must first be satisfied that all the creditors entitled to object to the reduction have either consented or been paid or secured.
Confirmation and Registration
Section 66 (3) of the Act states that if the NCLT is satisfied that either
- the creditors entitled to object have consented to the reduction, or
- that their debts have been discharged, paid or secured,
It may confirm the reduction.
Provided that no application shall be sanctioned by the Tribunal unless the accounting treatment proposed by the company for such reduction is in conformity with the accounting standards specified in section 133 or any other provision of this Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal
The NCLT may also direct that the words “and reduced” be added to the company’s name for a specified period.
Section 66 (5) states that the NCLT’s order confirming the reduction together with the minutes should be delivered to the Registrar within 30 days of receipt of the order who will registerthe same. The reduction takes effect only on registration of the order and minutes, and not before. The Registrar will then issue a certificate of registration in form No. RSC – 7 which will be a conclusive evidence that the requirements of the Act have been complied with and that the share capital is now as set out in the minutes.
The minutes will include:
- The amount of the share capital
- The number of shares into which it is divided.
- The amount of each share
- The amount, if any, at the date of registration deemed to be paid up on each share
Diminution of share capital is not a reduction of capital
In the following cases, the diminution of share capital is not to be treated as reduction of the capital:
- Where redeemable preference shares are redeemed.
- Where any shares are forfeited for non-payment of calls and such forfeiture amounts to reduction of capital.
- Where the company buys-back its own shares under Section 68 of the Act.
In all these cases, the procedure for reduction of capital as laid down in Section 66 is not attracted.
Liability of Members in respect of Reduced Share Capital
- Liability of a member shall not exceed the difference between the amount already paid on the share and the amount of the shares fixed by the scheme of the reduction.
If, however any creditor entitled to object to the reduction of share capital is not entered in the list of creditors by reason of his ignorance of the proceedings for reduction and, after the reduction the company is unable to pay his debt or claim, then:
- every person, who was a member of the company on the date of the registration of the order for reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount which he would have been liable to contribute if the company had commenced winding up on the day immediately before the said date; and
- if the company is wound up, the Tribunal may, on the application of any such creditor and proof of his ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to contribute, and make and enforce calls and orders on the contributories settled on the list, as if they were ordinary contributories in a winding up..
Mode of Reduction:
The mode of reduction, as laid down in Section 66 of the Companies Act, is as follows:
A company limited by shares or a company limited by guarantee and having a share capital may, if authorised by its articles, by special resolution, and subject to its confirmation by the NCLT on petition, reduce its share capital in any way and in particular:
Reduction of share capital without sanction of the Court
The following are cases which amount to reduction of share capital but where no confirmation by the Court is necessary:
Surrender of shares
- Surrender of shares – “Surrender of shares” means the voluntary surrender of shares already issued to the company by the registered holder of shares. Where shares are surrendered to the company, it will have the same effect as a transfer in favour of the company and amounts to reduction of capital.
Both forfeiture and surrender lead to termination of membership. However, in the case of forfeiture, it is at the initiative of company and in the case of surrender it is at the initiative of member or shareholder.
Forfeiture of shares
- Forfeiture of shares – A company may if authorised by its articles, forfeit shares for non-payment of calls and the same will not require confirmation of the Court.
Where power is given in the articles, it must be exercised strictly in accordance with the regulations regarding notice, procedure and manner stated therein, otherwise the forfeiture will be void. Forfeiture will be effected by mean of Board resolution. The power of forfeiture must be exercised bona fide and in the interest of the company.
Diminution of capital
- Diminution of capital – Where the company cancels shares which have not been taken or agreed to be taken by any person.
Redemption of redeemable preference shares.
Buy-back of its own shares.
Examples:
(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
Eg. where the shares are of Rs. 10 each with Rs. 7 paid up, reduce them to Rs. 7 fully paid-up shares and thus relieve the shareholders from liability on the unpaid/uncalled capital of Rs. 3 per share.
(b) either with or without extinguishing or reducing liability on any of its shares,—
(i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or
Eg. share of Rs. 10 fully paid-up is represented by Rs. 7 worth of assets. In such a situation company can by writing off Rs. 3 per share reduce capital. The assets side of the balance sheet assets which is cancelled. On the other side i.e. on the liability side share capital is reduced.
(ii) pay off any paid-up share capital which is in excess of the wants of the company,
Eg. where the shares are fully paid-up say Rs. 10, reduce them to Rs. 8 each and pay back, Rs. 2 per share
FAQ’s
- Can share premium account be utilised for reducing share capital?
Yes.
The capital was proposed to be reduced by utilization of the Securities Premium Account and General Reserve. There was to be no dimunition of liabilities or repayment of paid up capital. No reduction of issued, subscribed or paid up capital was involved. The Court said that the proposed reduction not being prejudicial in any manner was, therefore to be allowed.
(Alembic Ltd., Re (2008) 144 Com Cases 105 :(2009)89 SCL 19(Guj).
- Can the reduction result in extinguishment of class of shares?
Yes.
A scheme of amalgamation and arrangement involved reduction of share capital by extinguishment of shares of a particular class. The reduction was approved by majority of shareholders and creditors of transferee company. The court approved the reduction and extinguishment of portion of shares was held to be permissible as no one was prejudicially affected.
Siel Ltd., Re (2008) 144 Com Cases 469 :(2009)89 SCL 434(Del)
Note:
Section 66 Companies Act 2013 is applicable to a company limited by shares or a company limited by guarantee and having share capital. An unlimited company can reduce the share capital in the manner specified in the Articles and Memorandum of the company, as Section 66 Companies Act 2013 is not applicable.