Page 276 - DMGT407Corporate and Business Laws

Unit 11: Prospectus, Shares and Share Capital

(i) by reducing or extinguishing the liability of members for uncalled capital, e.g., where a Notes
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 reintroduced 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.

11.4.4 Procedure for Reduction of Capital

After passing the special resolution for the reduction of capital, the company has to apply to the
Court by way of petition to confirm the resolution under s.101. The creditors are entitled to
object where the proposed reduction of share capital involves either: (1) the diminution of
liability in respect of unpaid capital; or (2) the payment to any shareholder of any paid-up share
capital, or in any other case, if the Tribunal so directs.
To enable the creditors to object, the Court settles a list of such people. If any creditor objects,
either his consent to the proposed reduction should be obtained or he should be paid off or his
payment secured. However, the Court may dispense with the consent of a creditor on the
company securing payment of the debt or claim by appropriating the full amount or that fixed
by the Court.
Section 102 states that if the Court is satisfied that either the creditors entitled to object have
consented to the reduction, or that their debts have been paid or secured, it may confirm the
reduction. It may also direct that, the words “and reduced” be added to the company’s name for
a specified period and that the company must publish the reasons for the reduction and the
causes which led to it.
Section 103 provides for registration of the Court’s order with the Registrar. The company has
also to send the minutes giving details of the share capital as altered. The reduction of share
capital takes effect only on registration of the Tribunal’s order with the Registrar and not before.
The Registrar will issue a certificate of registration which will be a conclusive evidence that both
the requirements of the Act have been complied with and that the share capital is now as set out
in the minutes. The registered minutes are deemed to be substituted for the corresponding
capital clause in the memorandum, thereby altering the memorandum within the meaning of s.
40. The copies of the memorandum which will be issued subsequently must, therefore, be in
accordance with the articles.

Section 104 provides that after the reduction of capital, the members cease to be liable for calls
as regards the amount by which the nominal amount of their shares has been reduced. If,

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