Reduction of Share Capital

Section 66 of the Companies Act, 2013 deals with the reduction of share capital by companies and applies to companies limited by shares or guarantee with share capital. It does not differentiate between public and private companies. Section 66 of the Companies Act, 2013 is a combination of Sections 100 to 105 of the Companies Act 1956 with modifications. The modifications include:

1. Application to Tribunal: The application for share capital reduction must be made to the Tribunal instead of the Court, as per the 1956 Ac

2. Notices in Case of Listed Companies: For listed companies, the Tribunal must send notices to the Central Government, Registrar, and SEBI, in addition to creditors. They have three months from the notice date to respond. If no representation is received within this period, it is presumed that they have no objection to the capital reduction.

3. No Reduction if in Arrears: Companies with arrears in repayment of deposits or interest payments cannot reduce their share capital.

4. Exclusion of Buyback: This section does not apply to share buybacks under Section 68 of the 2013 Act.

5. Accounting Compliance:  The Tribunal will not approve capital reduction unless the company’s accounting treatment complies with Section 133 of the 2013 Act. A certificate confirming compliance from the company’s auditor must be filed with the Tribunal.

J.J. Irani Committee Report:

The report suggests that under the existing Act, share capital reduction requires shareholder approval through a special resolution and High Court sanction, which is time-consuming. To enhance flexibility and save time, it recommends that an institutional mechanism, such as the National Company Law Tribunal (NCLT), should handle these issues in a time-bound manner while safeguarding creditor interests.

Reduction of share capital

Section 66(1) of the 2013 Act corresponds to section 100 of the 1956 Act. Under section 66(1) of the 2013 Act, unlike section 100 of the 1956 Act, authorisation by articles is not required for reduction of capital. Although just as under the 1956 Act a special resolution and approval of court was required the same has been retained in the scheme of the 2013 Act with one exception being Tribunal replacing court. Another significant difference is the prohibition imposed by way of proviso to sub-section (1) of section 66 of the 2013 Act. The proviso bars the company to reduce the share capital 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. Therefore, whether the deposit was accepted before the commencement of the 2013 Act or is accepted after such commencement; if the company defaults in repayment of the same or in payment of any interest thereon, then share capital cannot be reduced.

Conservation and maintenance of share capital

In the conduct of a company whose members enjoy limited liability, care has to be taken that the share capital is not reduced to the prejudice of creditors. Creditors accept the risk that the company may lose money in the ordinary course of business [Guinness v Land Corporation of Ireland, (1882) 22 Ch D 349 at 375] but they are entitled to protection against reduction of the company’s net assets in other ways such as return of paid-up capital to shareholders either by way of a purported dividend, by redemption of shares before a winding up, by the company dealing in its own shares, or by improperly giving financial assistance to someone to purchase the company’s shares or at least in the case of a trading company by giving its assets away. A creditor needs this protection because in the words of JESSEL MR, “The creditor has no debtor but that impalpable thing the corporation, which has no property except the assets of the business. The creditor therefore, I may say, gives credit to that capital, gives credit to the company on the faith of the representation that the capital shall be applied only for the purposes of the business and he has therefore a right to say that the corporation shall keep its capital and not return it to the shareholders…” [Re, Exchange Banking Co. (Flitcroft’s case), (1882) 2 Ch D 519 at 533-534].

Thus the rule is that a company cannot cancel an allotment of shares otherwise than (a) in the course of a reduction of capital, or (b) where it is established that the contract under which shares were allotted was affected by mistake, misrepresentation or breach of a fundamental stipulation, or (c) as part of a compromise of a Bona fide dispute as to the existence of fraud or breach of a fundamental stipulation.

Legal protections for the creditor against improper repayment of paid-up capital or diminution of the liability of shareholders were developed in case law in the second half of the nineteenth century. That case law has been supplemented by legislation.

Need of and procedure for reduction

The need for reducing capital may arise in various ways; for example, trading losses, heavy capital expenses, and assets of reduced or doubtful value. As a result, the original capital may either have become lost or a company may find that it has more resources than it can profitably employ. In either case, the need may arise to adjust the relation between capital and assets. Indian National Press (Indore) Ltd., Re, (1989) 66 Com Cases 387, 392 (MP).

The Supreme Court in Punjab Distilleries India Ltd. v. CIT, (1965) 35 Com Cases 541, 544 summed-up the process of reduction thus: “First, there will be a resolution by the general body of a company for reduction of capital by distribution of the accumulated profits amongst the shareholders. Secondly, the company will file an application in the court for an order confirming the reduction of capital. Thirdly, after it is confirmed, it will be registered by the Registrar of Companies. Fourthly, after the registration the company will issue notices to the shareholders inviting applications for refund of the share capital and fifthly, on receiving the applications the company will distribute the said profits”. To the same effect is Homi Cowasji Bharucha v. Arjun Prasad, (1957) 27 Com Cases 6 (Pat).

A resolution for reduction of capital was confirmed where notice was given to members and creditors and there were no objections. Shakumbari Sugar & Allied Industrial Ltd. Re (2010) 97 SCL 138 (All).

Power of reduction of share capital

In the context of the 1956 Act, it has been held that for a company to reduce its share capital in any manner set out in this section, it must have power given to it under its articles to do so. An authority to do so given by the memorandum of association is of no avail. Re, Dexine Patent Packing & Rubber Co., 1903 WN 82. If the articles do not contain any provision for reduction of capital, the articles must first be altered so as to give the power and then the resolution for reducing capital must be passed, as a special resolution and the reduction effected by such resolution must be confirmed by the court. West India & Pacific Steamship Co., Re, (1868) LR 9 Ch App 11. A resolution for reduction agreed to by all the members entitled to vote is effective without a meeting.
Pearce Duff & Co. Ltd., Re, (1961) 31 Com Cases 251; (1960) 3 All ER 222, but as a matter of practice, courts generally insist upon the decision to be taken by a special resolution at a meeting. Barry Artist Ltd., Re, 1985 BCLC 283; Khattar Electrical Eng. & General Supply Co. Ltd., Re, (1938) 8 Com Cases 314 (Pesh).

The above rulings are to be seen in the light of section 66 of the 2013 Act whereunder there is no express requirement of authorisation under the articles. Therefore, a special resolution will suffice under the section 66 of the 2013 Act.

In exercising its power, the Court will have due regard to the interests of creditors, who may consent or object to the reduction. Under the 2013 Act, the Tribunal should also exercise due regard for interests of the creditors.

For approving the reduction of share capital, unlike sections 391/394 of the 1956 Act, there is no need for meetings of different classes of shareholders and the approval of majority of the equity shareholders will suffice. Similarly, no differentiation can be made between foreign equity shareholders and Indian equity shareholders and it was not necessary that reduction of capital should ne applied uniformly in respect of all shareholders. Chander Bhan Gandhi b Reckitt Belckiser (India) Limited, (2012) 170 Com Cases 363 (Del).