Page 197 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes is transferable as a whole; it cannot be split into parts. For example, a share of ` 10 can be
transferred as a whole; it cannot be transferred in parts. But if 10 shares of ` 10 each fully
paid are converted into stock, of ` 100, then the stockholder can transfer stock, say, worth
` 17 also.
Section 94 empowers a company to convert its fully paid-up shares into stock by passing a
resolution in general meeting, if its articles authorise such conversion. A notice is to be fi led
with the Registrar within thirty days of the passing of the resolution specifying the shares
so converted.
It is to be noted that stock cannot be issued in the first instance. It is necessary to fi rst issue

shares and have them fully paid-up and then convert them into stock. Also, stock can be
reconverted into fully paid-up shares by passing a resolution in general meeting.

When shares are converted into stock, the shareholders are issued stock certifi cates. In
the Register of Members, the amount of stock is written against the name of a particular
member in place of number of shares. The stockholder is as much a member of the company
as a shareholder.
4. Diminution of share capital. Sometimes, it so happens that shares are issued, but are not
taken up by the members of the public and, therefore, not allotted. Section 94 provides that
a company may, if its articles authorise, by resolution in general meeting, cancel shares
which at the date of the passing of the resolution in that behalf have not been taken or
agreed to be taken by any person and diminish the amount of the share capital by the
amount of the shares so cancelled. This constitutes diminution of capital and should be
distinguished from reduction of capital which is discussed herein below.

10.1.2 Reduction of Capital

Sections 100-105 provide for the reduction of share capital. A company limited by shares, if

so authorised by its articles, may, by special resolution, which is to be confirmed by the Court
reduce its share capital:
(i) by reducing or extinguishing the liability of members for uncalled capital, e.g., where a
share of ` 10 on which ` 5 are paid, is treated as a share of ` 5 fully paid-up. In this way
the shareholder is relieved from liability on the uncalled capital;
(ii) by paying off or returning capital which is in excess of the wants of the company, e.g.,
where there is a share of ` 10 fully paid-up, reduce it to ` 5 and pay back ` 5 to the
shareholder;
(iii) pay off paid-up capital on the understanding that it may be called up again, e.g., a share
of ` 10 is fully paid-up, on which ` 2.50 may be returned to the shareholder on the
condition that when necessary, the company may call it up again. Thus, the difference
between method (i) and this method is that the uncalled liability is not extinguished in the
latter;

(iv) a combination of the preceding methods;
(v) write off or cancel capital which has been lost or is not represented by available assets, e.g.,
a share of ` 10 fully paid-up is represented by ` 7.50 worth of assets. In such a situation,
reality can be re-introduced into the balance sheet position of the company by writing off
` 2.50 per share. This is the most common method of reduction of capital. The assets side

of the balance sheet may include useless assets, fictitious goodwill, preliminary expenses,
discount on issue of shares and debentures, etc. These assets are either cancelled or their
values are reduced to the extent they are useless. Correspondingly, share capital on the
liability side is reduced.

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