A company limited by shares has to state the share capital in the capital clause of its Memorandum of Association. As a general rule a company cannot provide for reduction of its share capital because preservation and conservation of capital is one of the important objects of company law. One of the core principles of company law is that a company limited by shares must maintain its share capital for the protection of creditors. However under certain situations provided under the Companies Act reduction of share capital of company is very much possible. Sections 100 to 104 are the provisions governing reduction of share capital.
Procedure of reduction:
According to Section 100 a company may reduce its share capital by passing a special resolution in an extraordinary general meeting and by obtaining confirmation for the same from Company Law Tribunal.
Section 100 also spells out the circumstances in which reduction of share capital may be provided for and these are as follows:
(i)To reduce the liability on shares which have remained unpaid
(ii) To cancel the capital which has been lost and
(iii) To pay of the capital which is in excess of its needs.
Section 101 provides that every creditor has a right to object reduction and hence the tribunal has to prepare a list of creditors. A notice of company’s intention to reduce share capital shall be given to the creditors. If any creditor wants to object the reduction of share capital he may do so by opposing the company’s petition before the tribunal.
Under Section 102 if the Company Law Tribunal is satisfied that the creditors have given their consent for the reduction and the company has fulfilled the claims of those having objection for reduction, it may proceed with confirmation of the reduction. It is pertinent to note here that the Tribunal cannot refuse confirmation of reduction on the grounds of “public policy” and does not go into the motive of the reduction.
According to Section 103 after the confirmation order is passed, the company has to file its certified copy for the purpose of registration with Registrar of Companies. When the Registrar registers the confirmation order he has to certify that company’s capital is reduced and this certificate becomes a conclusive evidence of the fact that the company has complied with all the requirements of registration.
Under Section 104, after the reduction the shareholder will not be liable for payment of any call or contribution.
The High Court have listed the following principles as forming the basis of the law relating to a reduction of share capital:
(1) The question of reduction of share capital is treated as a matter of domestic concern which means that it is the decision of the majority which prevails;
(2) If a majority by special resolution decides to reduce share capital of the company, it has also the right to decide how this reduction of share capital should be carried into effect;
(3) Reduction of share capital is purely a domestic matter and it is to be decided as to whether each member shall have his share proportionately reduced, or whether some members shall retain their shares unreduced, the shares of others being extinguished totally, receiving a just equivalent.
(4) A selective reduction of capital is permissible within the framework of law.
(5) The Court has to be satisfied that
(i) there is no unfair or inequitable transaction and
(ii) all the creditors entitled to object to the reduction have either consented or been paid or secured.
Industry experts are also of the view that reduction of share capital under Section 100 tantamount to nothing but a squeeze out of minority shareholders. A squeeze-out is a transaction in which a controlling shareholder buys out the minority shareholders. Therefore, the scheme of reduction of share capital shall be allowed very cautiously by the Company Law Tribunal as it may turn out to be a device of injustice to the minority shareholders.
Conclusion:
Capital reduction is a method of capital restructuring. The process of reduction of share capital involves company law tribunal’s sanction for its validity. This process is very lengthy, highly technical and time consuming. Therefore it needs to be made more simple and speedy
Procedure of reduction:
According to Section 100 a company may reduce its share capital by passing a special resolution in an extraordinary general meeting and by obtaining confirmation for the same from Company Law Tribunal.
Section 100 also spells out the circumstances in which reduction of share capital may be provided for and these are as follows:
(i)To reduce the liability on shares which have remained unpaid
(ii) To cancel the capital which has been lost and
(iii) To pay of the capital which is in excess of its needs.
Section 101 provides that every creditor has a right to object reduction and hence the tribunal has to prepare a list of creditors. A notice of company’s intention to reduce share capital shall be given to the creditors. If any creditor wants to object the reduction of share capital he may do so by opposing the company’s petition before the tribunal.
Under Section 102 if the Company Law Tribunal is satisfied that the creditors have given their consent for the reduction and the company has fulfilled the claims of those having objection for reduction, it may proceed with confirmation of the reduction. It is pertinent to note here that the Tribunal cannot refuse confirmation of reduction on the grounds of “public policy” and does not go into the motive of the reduction.
According to Section 103 after the confirmation order is passed, the company has to file its certified copy for the purpose of registration with Registrar of Companies. When the Registrar registers the confirmation order he has to certify that company’s capital is reduced and this certificate becomes a conclusive evidence of the fact that the company has complied with all the requirements of registration.
Under Section 104, after the reduction the shareholder will not be liable for payment of any call or contribution.
The High Court have listed the following principles as forming the basis of the law relating to a reduction of share capital:
(1) The question of reduction of share capital is treated as a matter of domestic concern which means that it is the decision of the majority which prevails;
(2) If a majority by special resolution decides to reduce share capital of the company, it has also the right to decide how this reduction of share capital should be carried into effect;
(3) Reduction of share capital is purely a domestic matter and it is to be decided as to whether each member shall have his share proportionately reduced, or whether some members shall retain their shares unreduced, the shares of others being extinguished totally, receiving a just equivalent.
(4) A selective reduction of capital is permissible within the framework of law.
(5) The Court has to be satisfied that
(i) there is no unfair or inequitable transaction and
(ii) all the creditors entitled to object to the reduction have either consented or been paid or secured.
Industry experts are also of the view that reduction of share capital under Section 100 tantamount to nothing but a squeeze out of minority shareholders. A squeeze-out is a transaction in which a controlling shareholder buys out the minority shareholders. Therefore, the scheme of reduction of share capital shall be allowed very cautiously by the Company Law Tribunal as it may turn out to be a device of injustice to the minority shareholders.
Conclusion:
Capital reduction is a method of capital restructuring. The process of reduction of share capital involves company law tribunal’s sanction for its validity. This process is very lengthy, highly technical and time consuming. Therefore it needs to be made more simple and speedy
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