Power of a Company to Reduce Its Share Capital

 

INTRODUCTION

As per Section 66 of the Companies Act 2013-

“Subject to confirmation by the NCLT on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may—

  1.      extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
  2. either with or without extinguishing or reducing liability on any of its shares,—
  3. cancel any paid-up share capital which is lost or is unrepresented by available assets; or
  4. 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:

Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon”.[1]

There is a need for reduction of share capital which may arise under various circumstances. The examples for reduction of share capital can arise under accumulated business, assets of reduced doubtful value, etc. The original capital can even become lost or a company may find it more resourceful than it can profitably employ.[2] In these case is the need for share capital may arise or the need for share capital may reduce.

COMPANIES ACT, 2013

When the Companies Act 2013 was form then there were some sections which included the power for governing reduction of share capital which was yet to be notified. Before that Companies Act, 1956 was being applied. The provisions which were under the reduction of share capital under new Companies Act 2013 are following-

POWER OF REDUCTION OF SHARE CAPITAL FOR A COMPANY

If company wants to reduce share capital then the company must have this power written under its article of association. If there is no such article present under any provision of articles of association then the company must alter or amend the articles of association to give such power and special resolution must be passed for reducing the share capital. The reduction of share capital must be confirmed by National Company Law Tribunal. The capital reduction cannot be undertaken if the company is in arrears, in the repayment of deposits which includes interest payable and thereon accepted by it.[3] This has been stated under Section 66 of Companies Act, 2013[4].

MODES OF REDUCTION FOR SHARE CAPITAL

Under the Companies Act, 2013, reduction of share capital is not prescribed in the manner there is any limitation on the power of the Tribunal to confirm the reduction. This must be satisfied by the creditors of the company and consented to set the direction or they have been paid off or their interest has been secured.[5]

PROCEDURE ASPECTS AS PER COMPANIES ACT 2013

SPECIAL RESOLUTION

If the reduction of share capital has not been mentioned in the articles of association then the company must altered the articles of association and this can be only done is the special resolution is passed. If there is no special resolution passed and the company cannot have the power to reduce its share capital. However, there are following cases under which the company has not to follow the process has provided under section 66 of the Companies Act 2013.

  1. If the redeemable preference shares are to be redeemed in accordance with the provision of section 55 then the company must not follow the process under section 66.
  2. If the shares are forfeited for the non payment of calls through the four features which amounts to the reduction of capital then the company does not have to follow the process under section 66
  3. If the nominal share capital of the company is reduced by the cancelling of shares then the company does not have to follow the process as provided under section 66. This has been stated under section 61 of the Companies Act, 2013.

The process under section 66 is not to be followed if the company purchase is its own share in accordance with the provisions of section 68 of the Companies Act, 2013.

TRIBUNAL SANCTION

For the reduction of share capital an application has to be made to the Tribunal for obtaining the sanction of reduction. The Tribunal must give notice of the application to the Central Government, Registrar and SEBI. The notice must also be given to the creditors of the company which are taken into consideration and the representation.[6]

If there is no notice received from the central government Registrar, SEBI or the creditors within the period of 3 months then it would be presumed that there is no objection to the reduction

The Tribunal will not sanction the scheme unless

  1. It is said that every creditor of the company has been consented to the said reduction
  2. The accounting treatment of such reduction must be in conformity with the accounting standards which are specified under Section 133 or any other provision of this act

The order of the confirmation of the reduction of share capital must be made by The Tribune and must be published by the company in the manner as directed by the Tribunal.

 As per section 2(42C) of Income -tax Act 1961, ‘slump sale’ means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.


[1] Reduction of share capital., , http://www.advocatekhoj.com/library/bareacts/companies2013/66.php?Title=Companies%20Act,%202013&STitle=Reduction%20of%20share%20capital (last visited Apr 26, 2017).

[2] Reduction of Share Capital – An Overview, , https://www.bcasonline.org/Referencer2015-16/Other%20Laws/Company%20Law/reduction_of_share_capital_an_overview.htm (last visited Apr 26, 2017).

[3] Reduction of Share Capital, , https://www.bcasonline.org/Referencer2015-16/Other%20Laws/Company%20Law/reduction_of_share_capital_an_overview.htm (last visited Apr 26, 2017).

[4]  Section 66 of Companies Act, 2013 states Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may—

  1. extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
  2. either with or without extinguishing or reducing liability on any of its shares,—
  3. cancel any paid-up share capital which is lost or is unrepresented by available assets; or
  4. 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.

[5] MCA notifies NCLT (Procedure for reduction of share capital of Company) Rules, 2016, (2016), https://caclub.in/nclt-procedure-for-reduction-of-share-capital-of-co-rules-2016-notified-by-mca/ (last visited May 6, 2017).

[6] Section 66, , http://www.taxmann.com/commentaries/samples/Volume2_SampleChapters.pdf (last visited May 6, 2017).

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