Reduction of Share Capital

Who may reduce, and how: section 66(1)

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:

• (a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
• (b) either with or without extinguishing or reducing liability on any of its shares,
• (i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or
• (ii) pay off any paid-up share capital which is in excess of the wants of the company,

and alter its memorandum by reducing the amount of its share capital and of its shares accordingly.

Three points on the opening words. The phrase "reduce the share capital in any manner" makes the three clauses illustrative, not exhaustive, which is why they are introduced by "and in particular". A company limited by guarantee without a share capital is outside the section. And the alteration of the memorandum happens as part of the reduction, not by a separate section 13 process.

The proviso is an absolute bar. 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.

Learn that proviso. A company that owes its depositors cannot reduce its capital at all, however good its reasons and however willing its members. No Tribunal discretion is involved.

Who is heard: section 66(2)

The Tribunal shall give notice of every application to:

• the Central Government;
• the Registrar;
• the Securities and Exchange Board, in the case of listed companies; and
• the creditors of the company,

and shall take into consideration the representations, if any, made by them within three months from the date of receipt of the notice.

The proviso supplies a deeming rule. Where no representation has been received from any of them within that period, it shall be presumed that they have no objection to the reduction.

So the three month period is not merely a deadline; silence is consent.

What the Tribunal must be satisfied of: section 66(3)

The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction on such terms and conditions as it deems fit.

Four alternatives for each creditor, and only one need be satisfied for each: the claim has been discharged, or determined, or secured, or the creditor's consent has been obtained.

The proviso adds an accounting gate. No application for reduction shall be sanctioned unless the accounting treatment proposed by the company is in conformity with the accounting standards specified in section 133 or any other provision of this Act, and a certificate to that effect by the company's auditor has been filed with the Tribunal.

That proviso exists because a reduction can be used to make a balance sheet say something untrue, and the auditor's certificate is the check.

After the order: section 66(4) and (5)

Section 66(4). The order of confirmation shall be published by the company in such manner as the Tribunal may direct.

Section 66(5): filing. The company shall deliver to the Registrar within thirty days of receipt of the copy of the order a certified copy of the order and of a minute approved by the Tribunal showing:

• (a) the amount of share capital;
• (b) the number of shares into which it is to be divided;
• (c) the amount of each share; and
• (d) the amount, if any, at the date of registration deemed to be paid-up on each share,

and the Registrar shall register the same and issue a certificate to that effect.

Two savings: section 66(6) and (7)

Section 66(6). Nothing in this section shall apply to buy-back of its own securities by a company under section 68.

That is a clean division of labour. A buy-back also returns money to members, but it has its own code in sections 68 to 70, with its own limits and its own safeguards, and it does not go to the Tribunal.

Section 66(7): the members' liability afterwards. A member, past or present, shall not be liable to any call or contribution in respect of any share held by him exceeding the amount of the difference, if any, between the amount paid on the share, or the reduced amount deemed to have been paid on it, and the amount of the share as fixed by the order of reduction.

In plain terms: once the reduction is confirmed, a member's exposure is measured against the reduced figure, not the old one.

The creditor who was left off the list: section 66(8)

Where the name of a creditor entitled to object is not entered on the list of creditors by reason of his ignorance of the proceedings or of their nature and effect with respect to his debt or claim, and the company afterwards commits a default in paying his debt or claim, the section provides for that creditor's protection, the persons who were members at the date of the registration of the order being liable to contribute up to the amount by which their liability was reduced.

The principle is simple even where the drafting is not: a creditor cannot be deprived of his security by a process he never heard about.

A worked example

Wardha Engineering Limited has a paid-up capital of ten crore rupees in one crore shares of ten rupees each. Accumulated losses stand at four crore rupees. It also holds two crore rupees of cash it no longer needs after selling a division, and it has an uncalled liability of two rupees a share on a class of partly paid shares.

Three reductions, one section. It may cancel four crore rupees of paid-up capital which is lost or unrepresented by available assets, under section 66(1)(b)(i). It may pay off two crore rupees as capital in excess of the wants of the company, under section 66(1)(b)(ii). And it may extinguish the uncalled two rupees a share, under section 66(1)(a).

First, a bar to check. Does the company owe anything on deposits it has accepted, or interest on them? If it is in arrears, the proviso to section 66(1) forbids the reduction outright.

The resolution. A special resolution, and an application to the Tribunal for confirmation.

Who is heard. The Tribunal gives notice to the Central Government, the Registrar, SEBI if the company is listed, and the creditors, and considers any representations made within three months. A creditor who says nothing in that period is presumed to have no objection.

What the Tribunal looks for. That every creditor's claim has been discharged, determined or secured, or his consent obtained. And, by the proviso to section 66(3), that the accounting treatment conforms to the section 133 standards, certified by the company's auditor and filed with the Tribunal.

After confirmation. The company publishes the order as the Tribunal directs, and within thirty days of receiving the copy delivers to the Registrar a certified copy of the order and the Tribunal approved minute showing the amount of share capital, the number of shares, the amount of each share and the amount deemed paid up on each. The Registrar registers it and issues a certificate.

A member's position afterwards. Ms Salunkhe holds partly paid shares on which two rupees was uncalled and is now extinguished. By section 66(7) she cannot be called on beyond the difference between what she has paid and the amount of the share as fixed by the order of reduction.

A forgotten creditor. A supplier with an old disputed bill never heard of the proceedings and was left off the list. If the company later defaults on his claim, section 66(8) protects him, and the persons who were members at the date of registration of the order may be called on up to the amount by which their liability was reduced.

And a contrast. Had the company instead wished to buy back its own shares, section 66 would not apply at all: section 66(6) excludes a buy-back under section 68, which has its own limits and needs no Tribunal.

Distinctions that carry marks

What this does NOT mean

It does not mean the three clauses are the only ways to reduce. Section 66(1) says "in any manner" and introduces them with "and in particular".

It does not mean creditors must all consent. For each creditor it is enough that the claim is discharged, determined or secured, or his consent obtained, and silence for three months is presumed to be no objection.

It does not mean a reduction can be used to tidy up a balance sheet freely. The proviso to section 66(3) requires conformity with the section 133 accounting standards and an auditor's certificate.

It does not mean a company in arrears on deposits can reduce with the Tribunal's leave. The proviso to section 66(1) is an absolute bar.

Quick revision

• 66(1): company limited by shares, or by guarantee and having a share capital; special resolution; confirmation by the Tribunal; reduce in any manner, and in particular (a) extinguish or reduce unpaid liability, (b)(i) cancel paid-up capital lost or unrepresented by available assets, (b)(ii) pay off capital in excess of the wants of the company; memorandum altered accordingly. Proviso: absolute bar where the company is in arrears on deposits or interest.
• 66(2): notice to the Central Government, Registrar, SEBI for listed companies, and creditors; representations within three months; silence presumed to be no objection.
• 66(3): Tribunal satisfied that every creditor's claim is discharged, determined or secured, or his consent obtained. Proviso: accounting treatment conforming to section 133 standards, certified by the auditor and filed.
• 66(4): publish the order as the Tribunal directs.
• 66(5): certified copy and the Tribunal approved minute (capital, number of shares, amount of each, amount deemed paid up) to the Registrar within thirty days; Registrar registers and certifies.
• 66(6): does not apply to a buy-back under section 68.
• 66(7): a past or present member is not liable beyond the amount fixed by the order of reduction.
• 66(8): a creditor left off the list through ignorance of the proceedings is protected if the company later defaults.

Test yourself

1. What are the three particular modes of reduction in section 66(1)? Extinguishing or reducing the liability on shares in respect of capital not paid up; cancelling paid-up capital which is lost or unrepresented by available assets; and paying off paid-up capital in excess of the wants of the company. The section permits reduction in any manner, so these are illustrative.

2. What is the absolute bar on a reduction? The proviso to section 66(1): no reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, before or after the commencement of this Act, or of the interest payable on them.

3. To whom must the Tribunal give notice, and what happens if nobody replies? To the Central Government, the Registrar, SEBI in the case of listed companies, and the creditors. Representations are considered if made within three months of receipt of the notice, and where none is received it is presumed that there is no objection: section 66(2) and its proviso.

4. Of what must the Tribunal be satisfied before confirming a reduction? That the debt or claim of every creditor has been discharged or determined or secured, or his consent obtained: section 66(3). By the proviso it must also have an auditor's certificate that the accounting treatment conforms to the accounting standards specified in section 133.

5. What must be filed after the order, and within what time? A certified copy of the Tribunal's order and of the minute approved by the Tribunal showing the amount of share capital, the number of shares, the amount of each share and the amount deemed paid up on each, delivered to the Registrar within thirty days of receipt of the copy of the order: section 66(5).

6. Does section 66 apply to a buy-back? No. Section 66(6) provides that nothing in the section applies to a buy-back of its own securities by a company under section 68.