What is Capital reduction?
A company restricted by the shares or a company restricted by guarantee and having share capital can if certified by its articles, by special resolution and subject to confirmation by the court on petition reduce its share capital.
It may affect reduction of its share capital in any of following situation :
Where the company is over capitalized :
- It may extinguish or decrease the liability of member in respect of uncalled or unpaid capital. For example, where shares are of Rs100 each with Rs60 paid up, the company may decrease them to Rs60 fully paid and thus release the shareholder from the liability on uncalled capital of Rs. 40/-.
- Pay off or return element of the unpaid capital not wanted for the purpose of the company. For example, where the shares are completely paid of Rs100 they may be reduced Rs40 each and Rs60 may be paid back to the shareholders.
- Pay off part of the paid up share capital on the footing that it may be called up once more. If shares are of Rs100 each the company may pay off Rs25 for each share on condition that when desired the company may call it again without extinguishing the liability of shareholders to pay the uncalled share capital.
- Decrease by a combination of the aforesaid methods
Where has suffered loss of capital, in such circumstances the company can write off or terminate the share capital which has been lost or is unrepresented by available assets.
Where the company has passed the resolution for reducing the share capital, it must, by petition, apply to the court in the approved form to the court for an order confirming the reduction. Where the planned reduction of share capital involves the either diminution of liabilities in respect of unpaid share capital or the compensation to any shareholder of any paid-up share capital or in any other case if the court so directs the following provisions shall have effect
- Each creditor of the company who on the date fixed by the court is allowed to debt from or any claim against the company shall be entitled to object to the reduction.
- The Court shall settle a list of creditors so allowed to object and for that purpose shall determine as far as possible without requiring an application from any of the creditors, the names of creditors and the nature and amount of debt or claims and publish notices fixing the day or days within which creditors not entered in the list are to be entered if they so desire.
- Where a creditor entered on the list whose debt or claim is not discharged or has not been determined does not approved to the reduction, the court may, if it thinks fit, dispense with the consent of the creditors if the company secures payment of this debt or claim by appropriating the sum as the court may direct.
- The company admits the complete amount claim or debtor though not admitting it is willing to provide for it, then the full sum of debt or claim If the company does not admit and is not willing to offer for the complete amount of debt or claim or if the amount is contingent or not ascertained, then amount fixed by the court after due enquiry.
- Where the proposed reduction of share capital involves either diminution of any responsibility in respect of the unpaid share capital or payment of any shareholder of any paid share capital, the Court may, having regard to any special circumstances of the case as it thinks proper so to do, direct that the above provisions shall not be relevant to any class or classes of creditors.
- If the court is pleased with respect to every creditor of the company entitled to object to reduction that either his consent to the reduction has been obtained or his that debt or claim has been discharged or has been determined or has been protected, make an order confirming the reduction on such terms and conditions as it thinks fit.
- Where the court makes such an order, it may, if for any special reasons thinks fit and proper to do so, make an order directing that the company shall during such period commencing on and any time after the date of the order as is specified in the order add to its name as the last words the words "& Reduced" and make an order requiring the company to publish the same along with the reasons for the reduction or such other information in regard thereto as the court may think expedient with view to giving proper information to the public and if the court thinks fit the causes which led to reduction.
- Where the company is ordered to insert to its name the words "& Reduced" those words shall until the termination of period specified in the order shall be deemed to be part of the name of the company.
- The registrar, on the production to him, of an order of the court confirming the decrease of the share capital of the company and on delivering to him the certified copy of the order and of minutes agreed by the court showing with respect to the share capital of the company as altered by the order register the reduction of share capital, on registration of order and minutes, the reduction of share capital shall take effect.
- Notice of the registration shall be published in such way as the court may direct