Reduction of Share Capital under Companies Act 2013

Narendra Kumar

17 Nov, 2021

Reduction of share capital is defined as the reduction of issued, subscribed and paid-up capital of the company.

Reduction of Capital Requires

• Special Resolution
• Authorization in Articles
• Confirmation of Tribunal (NCLT)

The need for reduction of capital may arise in various circumstances such as trading losses heavy capital expenses and assets of reduced or doubtful value.

Applicability of section 66

Section 66 of the Companies Act, 2013 is applicable to a company which is limited by shares or the companies that are limited by guarantee & having share capital.

Non Applicability of Section 66

The unlimited company can decrease the share capital in a manner specified in Articles of association & Memorandum of Association of the company, as Section 66 of the Companies Act, 2013 is not applicable.

Modes of Reduction

The mode of reduction is as follows:

Companies which are limited by shares or the company limited by guarantee & having share capital may, by way of special resolution if authorized by its articles & subject to its confirmation by the tribunal on petition, reduce its share capital in any way and in particular:

• Extinguishment or reduction in the liability on any of its shares with regard to the share capital not paid-up; or
• Either with or without extinguishing or reducing liability on any of its shares,—
  • Cancel any paid-up share capital which is been lost or is unrepresented by available assets; or
  • Pay off any paid-up share capital which is in excess of the wants of the company, alter its Memorandum by reducing the amount of its share capital and of its shares accordingly

Reduction of share capital without sanction of Tribunal (NCLT)

The following are the cases that amount to the reduction of the share capital but in such cases no confirmation by the Tribunal is necessary:

• Surrender of shares – “Surrender of shares” is defined as the surrender of shares already issued to the company by the registered holder of shares. Where shares are surrendered to the company, whether by way of settlement of a dispute or for any other reason, it will have the same effect as a transfer in favor of the company and result to the reduction of capital. But In case such shares, instead of being surrendered to the company, are transferred to the nominee of the company then there will be no reduction of capital.

The Companies Act does not contain any provision for surrender of shares. Therefore surrender of shares is valid only when (AOA) Articles of Association provide for the same &:

• Where forfeiture of such shares is justified; or
• When shares are surrendered in exchange for new shares of the same nominal value.

Both forfeiture & surrender leads to the termination of membership.

• Forfeiture of shares – the company may if authorized by its articles, forfeit shares for non-payment of calls & same won’t require confirmation of Court.
• Diminution of capital – Where a company cancels shares which haven’t been taken or agreed to be taken by any person.
• Redemption of redeemable preference shares.
• Buy-back of its own shares.

Equal Reduction of Shares of One Class

Where there is only 1 class of shares, the same % should be paid off or canceled or reduced with respect to each share, but where different amounts are paid-up on the shares of the same class, the reduction of capital can be affected by equalizing the amount which is paid up.

Note: It is, however, not necessary that extinguishment of shares in all cases should necessarily result in the reduction of share capital. Accordingly, where the reduction is not involved, Section 100 would not be attracted.

Creditors’ Right to Object to Reduction

After passing the special resolution for reduction of capital, for a company, it is requisite to apply to the Tribunal (NCLT) by way of the petition for the confirmation of the resolution.

Where the proposed reduction of share capital involves either

• diminution of liability with respect to unpaid share capital, or
• the payment to any shareholder of any paid-up share capital, or
• in any other case, if the tribunal so directs, the following provisions shall have effect:

The creditors having a debt or claim admissible in winding up are entitled to object. To enable them to do so, the tribunal will settle a list of creditors entitled to object. In case of any creditor objects, then either his consent to the proposed reduction has to be obtained or he should be paid off or his payment has to be secured. The Tribunal, in deciding whether or not to confirm the reduction will take into consideration the minority shareholders and creditors.

The Tribunal will give notice of every single application made by the Central Government, Registrar & to the Securities and Exchange Board (SEBI), in case of listed companies, & creditors of the company & shall take into consideration the representations, if any, made to it by that Government, Registrar, the Securities and Exchange Board of India & the creditors within the period of 3 months from the date of receipt of notice:

Provided that where no such representation has been received from the Central Government, Registrar, the Securities and Exchange Board or the creditors within the said period then it shall be presumed that they have no objection to such a reduction of capital.

While exercising its discretion, the Court must make sure that the reduction of capital is fair & equitable. In short, the Court shall consider the following, while sanctioning the reduction:

• The interests of creditors are safeguarded;
• The interests of shareholders are considered; &
• Lastly, the public interest is taken care of.

Confirmation and Registration

It states that if the Court is satisfied that either the creditors entitled to the object have consented to the reduction, or that their debts have been determined, discharged, paid off or is secured then it may confirm the reduction of share capital on such terms & conditions as it deems fit.

The order of confirmation of the reduction of share capital by the Tribunal shall be published by the company in such manner as the Tribunal may direct.

The reduction of capital takes effect only on registration of the order & minutes, and not before. The Registrar will then issue a certificate of registration which will be a conclusive evidence that all requirements of the Act have been complied with & the share capital is now as set out in minutes. The Memorandum has to be altered accordingly.

Conclusiveness of certificate for reduction of capital

Where the Registrar had issued his certificate approving the reduction, the same was held to be conclusive even if it was discovered later that the company did not have authority under its articles to reduce capital. Similarly, if special resolution for reduction is an invalid one, but company had still gone through with the reduction, the reduction was not allowed to be upset

Liability of Members in respect of Reduced Share Capital

In case the reduction of share capital, a member of company whether past or present, shall not be liable to any call or contribution in respect of any share held by him is greater than the amount of difference, if any, between the amount paid on the share, or reduced amount which is to be deemed to have been paid thereon, as the case may be, & the amount of share as fixed by the order of reduction.

Reduction of Share Capital & Scheme of Compromise or Arrangement

The arrangement includes ‘a reorganization of the share capital of a company’ & reorganization can involve reduction of share capital. However, as part of a scheme of compromise or arrangement, distinct formalities as prescribed under section 100 do not have to be observed. It may however to be noted that, in all such cases involving reduction of share capital in scheme of compromise or arrangement, the petition seeking such confirmation of court with respect to scheme must also expressly mention that the company is also seeking, at the same time, the confirmation of court in regard to reduction of share capital, & that, while seeking consent of the members to the scheme, the consent of the members with respect to the reduction of share capital had also been obtained. The power of court to give to the creditors an opportunity of raising the objections to reduction of capital is discretionary