Form of Reduction

the reduction of capital may take in the form of Reducing the liability of the shareholders in respect of any unpaid amount on the shares held by them or paying off any paid-up share capital which is in excess of its requirement or cancelling any paid-up share capital is lost or unrepresented by available assets.

Reduction of capital can take any one of the following three forms:

(a) Cancelling any paid-up share capital which is lost or unrepresented by available assets together with or without extinguishing or reducing liability on shares.

(b) Reducing (or Extinguishing) in liability in respect of unpaid/uncalled amount.

(c) Paying off paid-up capital which is in excess of the needs of the company together with or without extinguishing or reducing liability on shares.

Procedure for Reduction of Share Capital (Secs. 100-103):

(a) Reduction of capital is possible only when the same is permitted by the Articles and a special resolution is passed to that effect.

(b) The company must apply to the court for an order confirming the reduction and the same can be carried out only when the scheme is confirmed by the court.

(c) Generally, the court confirms the second type of reduction without consulting the creditors in order to maintain the interest of the creditors (i.e., their interest must not be affected).

(d) Actually, creditors’ interests are affected by the first and third type of reductions. Naturally, the court will confirm the reduction after consulting the creditors. If there are some unwilling creditors, the company will have to settle their claims.

(e) The order of confirmation is to be passed by the court only when the consent of creditors is secured and their claims have been duly settled.

(f) The court may order that the company shall add the words “And Reduced” at the end of its name and also the company shall publish the reasons for reduction in local papers.

(g) The court’s order must be filed with the Registrar of Companies.

(h) Reduction of capital may also involve the variation of shareholders’ right (i.e., on different classes of share). This can be done subject to:

(i) the consent of the holder of at least three-fourths of the shares of the class concerned must be obtained, and

(ii) holder of at least one-tenth of the issued share capital affected by variation may apply to the court within 21 days after the consent is obtained or resolution is passed for the cancellation of such variation. Here, the decision of the court is final.

Reduction of Capital: Sometimes there may be a genuine necessity for the reduction of capital. This power is, given by Section 100 of the Companies Act, subject to the compliance of conditions. According to this, a company may.

(1) Extinguish or reduce the liability on any of its shares in respect of share capital not paid up.

(2) cancel any paid-up share capital which is lost or is unrepresented by any available assets.

(3) pay off any paid-up share capital which is in excess of what is required by the company. Conditions for effecting a reduction.

Following conditions are required to be fulfilled by a company to reduce its share capital:

(a) The Articles of Association of the company must permit it to reduce its capital.

(b) The company in general meeting shall pass a special resolution to reduce its capital.

(c) The approval of National Company Law Tribunal (previously Court) shall be obtained for the scheme of reduction in share capital.