Section 66 of the Companies Act, 2013 and the provisions with respect to Reduction of Share Capital of a Company.

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Section 66 of Companies Act, 2013, is a part of chapter IV (Share Capital and Debentures), it primarily discusses the steps for a company to reduce its share capital and provide disclosures for the same.

Section 66 of Companies Act, 2013, is a part of chapter IV (Share Capital and Debentures), it primarily discusses the steps for a company to reduce its share capital and provide disclosures for the same.

A reduction of share capital is unlawful unless it is sanctioned by the National Company Law Tribunal. The share capital of the company is the only security that the creditors depend on as any reduction of this share capital reduces the fund out of which they are to be paid and this is why it is closely guarded.

The provisions relating to capital reduction under the new Companies Act, 2013 are as under:

Power of the company for reduction of share capital

A company must have the power under its Articles of Association to reduce its share capital. If the Articles do not include any provision for the reduction of capital, the Articles must first be modified to give such authority and then the special resolution must be passed for reducing capital. the National Company Law Tribunal must confirm the reduction effected by such resolution. If the company is in debts in the repayment of any deposits (including interest payable thereon) accepted by it then no capital reduction can be undertaken.

Modes of reduction of share capital

The Act does not specify the manner in which the capital reduction is to be affected nor is there any restriction on the power of the Tribunal to confirm the reduction, except that it must be assured that every creditor of the company has either agreed to the said reduction or their interest has been secured or they have been paid off.

PROCEDURE FOR REDUCTION OF SHARE CAPITAL

Special Resolution

A reduction of share capital is unlawful unless it is sanctioned by the Tribunal. As authorised by the Articles, a company cannot affect share capital reduction unless a special resolution is passed for the reduction of share capital.

  1. Where redeemable preference shares are redeemed in accordance with the provisions of sections 55.
  2. Where any shares are forfeited for non-payment of calls, though the forfeiture as a fact amounts to a reduction of capital.
  3. Where the nominal share capital of a company is reduced by cancelling any shares, which have not been taken or agreed to be taken by any person. (Section 61)
  4. Where a company purchases its own shares in accordance with provisions of section 68.

Tribunal Sanction

Next move would be to make an application to the Tribunal to get the sanction for the reduction. The Tribunal shall give the notice of the application to the Central Government, Registrar, SEBI (in case of listed companies) and creditors of the company to take into consideration their representations. After this, it would confirm the reduction.

If no representation is received from the Central Government, Registrar, SEBI or the creditors within a period of 3 months then it would be considered no objection is there towards the reduction.

The Tribunal will not sanction the scheme unless:

  • It is assured that every creditor of the company has either agreed to the said reduction or their debt/claim has been secured or discharged.
  • The accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in section 133 or any other provision of this Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal
  • The order of confirmation of the reduction of share capital by the Tribunal is to be published by the company in such manner as the Tribunal may direct.

The company, within 30 days of the receipt of the order’s copy, has to provide the Registrar with the certified copy of the order of the Tribunal, who shall then register the same and issue a certificate to that effect.

REDUCTION OF CAPITAL UNDER SECTION 242

There is another circumstance, apart from the reduction of capital referred to in section 66 when the share capital can be reduced. In the case of oppression and mismanagement, the Tribunal has been given powers under section 242 to pass an order as it thinks fit which may provide for the purchase of shares of any members by the company and consequent reduction of the share capital.

Reckitt Benckiser Ltd., in which the Delhi High Court held that the issue of reduction of share capital should be regarded as an internal issue of the company. In this given case, Reckitt Benckiser Limited, after a series of open offers, was delisted and a reduction to return capital to all the remaining public shareholders was proposed. But the reduction was opposed by a shareholder group on the basis that there was no need to reduce the capital and the reduction was biased as it would extinguish the class of public shareholders. In the end, RBIL offered to let the objectors remain as shareholders and soon, the Delhi High Court approved the capital reduction.

CONCLUSION

Section 66 of the Company’s Act provides a secured mechanism for the necessary situations when a company needs to reduce its share capital. The creditors are directly affected by reducing the share capital of a company and as such, it is a procedure heavily regulated and a lot of disclosures by the company is required.

Shivam Kapoor

Shivam Kapoor

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