Page 277 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes however, any creditor entitled to object to the reduction of share capital is not entered on the list
of creditors, then every member at the time of the registration of the L.L.B. order and minutes is
liable to contribute for the payment of that debt.
Section 105 provides for punishment with imprisonment extending to one year or with fine or
both, if any officer of the company knowingly conceals the name of any creditor entitled to
object to the reduction or misrepresents the nature or amount of claim or debt or abets such
concealment or misrepresentation.

11.4.5 Reduction of Share Capital without the Sanction of the Court

There are some cases in which there is reduction of share capital and no confirmation by the
Court is necessary. These are:
(i) Forfeiture of shares. A company may, in pursuance of its articles, forfeit shares for non-
payment of calls.
(ii) Surrender of shares. It is a shortcut to forfeiture. It may be accepted by the company under
circumstances where its forfeiture is justified. It has the effect of releasing the shareholder
whose surrender is accepted from liability on shares.
(iii) Diminution of capital. This has already been explained. Section 94 clearly states that
diminution of capital does not amount to reduction of capital.
(iv) Redemption of redeemable preference shares. This has already been explained as provided
by s.80.
(v) Purchase of shares of a member by the company under s. 402. The Company Law Board
may order the purchase of shares of any member of the company by the company, under
certain circumstances.

Notes Reduction of Capital vs Diminution of Capital
Reduction of capital involves working off past losses against capital cancellation of the
uncalled capital or repayment of surplus capital. It may involve reduction of issued capital,
subscribed or paid up share capital. Diminution of capital denotes cancellation of the
authorised or issued capital (but not subscribed). Diminution of capital does not constitute
a reduction of capital within the meaning of the Companies Act. The distinction between
reduction and diminution of capital is as follows:
1. Diminution of capital is the reduction of the issued capital. Reduction of capital involves
reduction of subscribed or paid up capital; there is no reduction of issued capital.

2. Both require authorisation by Articles but whereas ‘diminution’ can be effected by
an ordinary resolution (if so authorised by Articles), reduction of capital cannot be
effected without passing a special resolution.
3. ‘Reduction’ requires confirmation by Court (s.100) but ‘diminution’ needs no
confirmation by the Court (s.94).

4. In case of ‘reduction’, Court may order the company to add the words ‘and reduced’
after its name [s.102 (3) but no such order can be passed in case of ‘diminution’ s.94].
5. In case of ‘diminution’, notice is to be given to Registrar within 30 days from the
date of cancellation whereupon the Registrar shall record the notice and make the
Contd...

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