Page 89 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes thus diminish the amount of its nominal share capital. Diminution of share capital is different from
the reduction of share capital. Diminution of capital is unissued share capital, while reduction of
share capital is for subscribed/paid up capital. For the reduction of capital, sanction of the court
is mandatory while cancellation of unissued capital does not require the sanction of court.
Accounting Treatment: Cancellation of the unissued shares capital does not require any journal
entry in the books of the company because it does not have any effect on the issued shares
capital.

self assessment

Fill in the blanks:
8. Reduction of capital is lawful only when it is sanctioned by………..
9. ……………is required for the cancellation of unissued share capital.
10. Internal reconstruction is adopted to write off ……………

11. On the reduction of capital, the security of creditors ………….
12. Only ………… adopts internal reconstruction.
13. Alteration of the capital must be noticed to the Registrar within ………. days of doing so as
per Section 95.
14. Consent of creditors is required when ………….. share capital is reduced.
reduction of share capital

Capital reduction of a company takes place strictly in accordance with the legal provisions of
Section 100 to 105 of the Companies Act, 1956. If the company is authorized by its Articles of
Association, it may, by a special resolution and on its confirmation by the court on petition,
reduce its shares capital by the following ways:
(a) Reducing or extinguishing the liability of shareholders in respect of share capital not
paid up.
(b) Writing off or cancelling any paid up capital which is lost by available assets.
(c) Paying off paid up capital in excess of the requirements of the company.
(d) Any other method approved by the court.
As per Section 100, reduction (b) and (c) may be made either in addition to or without extinguishing
or reducing the liability of shareholders for uncalled capital.
Any reduction of capital is dangerous for creditors, as issued capital of a company represents the
security on which the creditors rely. Generally, companies do not call the full value of shares at
one time. The uncalled capital acts as a future security for the creditors of the company. Therefore,
any reduction in capital reduces the security of the creditors. In such a situation the creditors are
entitled to object to the reduction. For this purpose the court shall settle a list of creditors and hear
their objections, if any, and on being satisfied that either the creditors consent to the reduction
or that their debts have been discharged or secured by the company, may confirm the reduction
on any terms it thinks fit. As per Sections 101 & 102 the court may direct the company to add the
words “and reduced” to its name for a fixed period and to publish the reasons for reduction for
the information of the public.

As per Section 103, the order of the court and minutes as approved by the court have to be filed
with the Registrar who will register them and issue a certificate of registration which will be a
conclusive evidence that everything is in order.

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