Reduction of share capital is a type of change of conditions of Memorandum of a company. Here the liability of shareholder can also be reduced for the shares held by him. As a result the total share capital of the company is reduced. The financial strength, ability to do business, capacity to repay the creditors etc. of a company depends on its capital, which is of great significance. On reduction of share capital the interests of the creditors and lenders are affected. There are rigorous provisions in the Companies Act with regard to reduction of share capital for protection of creditors.
The common purpose of reduction of share capital is to cancel any paid up capital lost in accumulated losses of the company. It is also used to increase earnings or dividends per share on reduced capital base. Capital reduction is used to return surplus funds or capital to the shareholders when the company is overcapitalized. In times of slow down of According to Section 100 of the Companies Act, subject to confirmation by the Court, if permitted by its Articles a company can reduce its share capital either with or without reducing liability on any of its shares by canceling any paid up capital lost or not represented by available assets or by paying off any paid up share capital in excess of the needs of the company. A company may also reduce its share capital by reducing the liability of its members on any of its shares not fully paid up.
However, redemption of redeemable preference shares, surrender of shares, forfeiture of shares, acceptance by the company of shares as a gift and cancellation of unissued shares, purchase under an order of the Court in a scheme of arrangement or amalgamation under Sections 391-394 of the Companies Act, are not considered as reduction of share capital.
According to Section 402 of the Companies Act when an application is made under Section 397 and 398 of the said Act for remedy against oppression and mismanagement, the Company Law Board can order the company to buy the shares or interests of any members of the company. In such circumstances there is reduction of share capital without the following elaborate procedures prescribed in the provisions of Sections 101 to 104 of the Companies Act.
For reduction of share capital the company shall pass a special resolution by ¾ majority of members present and voting either in person or by proxy and then make a petition to the Company Law Board for confirmation. When there is a proposal for reduction of liability in respect of amount unpaid on shares or return to any shareholder of any paid up share capital, for every creditor either his consent has to be obtained or debt secured or repaid, to the satisfaction of the Company Law Board, upon which only the Board will confirm the reduction of share capital. The company has to deliver to the Registrar of Companies a copy of the Company Law Board’s order along with the minutes of the special resolution showing the changed position of the share capital structure. On such registration capital reduction will be effective. Notice of such registration shall be published as specified by the Company Law Board. The Registrar of Companies shall certify such reduction as conclusive evidence. The Memorandum of Association of the company will now be deemed to be altered and every copy it has to be the changed version.
Under Section 104 of the Companies Act after reduction of share capital a member shall not be liable in respect of his share to any call or contribution in excess of the reduced capital amount.
