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Home List Manuals Companies LawCompanies Act, 1956 - Ready Reckoner [OLD]Ready Reckoner - Companies Act, 1956 This

Companies Act, 1956 - Ready Reckoner [OLD]

Ready Reckoner - Companies Act, 1956

FINANCIAL RESTRUCTURING - REDUCTION OF SHARE CAPITAL

  • Contents

Financial structure of a company comprises of:

  1. Paid up equity and preference share capital
  2. Reserves
  3. Borrowings in the form of
  • Long  term loans from financial institutions
  • Working capital from banks including loans through commercial papers
  • Debentures
  • Bonds
  • Credits from suppliers
  • Trade deposits
  • Public Deposits
  • Deposits and loans from directors, their relatives and business associates
  • Deposits from shareholders
  • GDRs, ADRs, FCCCBs
  • Funds raised through any other local instrument.

 

Need for financial restructuring

  1. Necessity for injecting more working capital to meet the market demand for the company’s products or services.
  2. When the company is unable to meet its current commitments
  3. When the company is unable to obtain further credit from suppliers of raw materials, consumable stores, brought – out components etc. and from other parties like those doing job work for the company.
  4. When the company is unable to utilize its full production capacity for lack of liquid funds.

 

Restructuring of under – capitalized company

An undercapitalized company may restructure its capital by taking one or more of the following corrective steps:

  1. Injecting more capital whenever required either by resorting to rights issue/ preferential issue or additional public issue.
  2.  Resorting to additional borrowings from financial institutions, banks, other companies.
  3. Issuing debentures
  4. Inviting and accepting fixed deposits from directors, their relatives, business associates and public.

 

Restructuring of over – capitalized company

An over capitalized company may restructure its capital by:

  1. Buy back of own shares.
  2. Paying back surplus share capital to shareholders
  3. Repaying loans to financial institutions, banks, etc.
  4. Repaying fixed deposits to public
  5. Redeeming its debentures, bonds, etc.

 

Reorganization of capital

In accordance with Section 390(b) of the Companies Act, the expression "arrangement" includes a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or, by both those methods.

 

Reduction of Share Capital

It means reduction of issued, subscribed and paid – up capital of the company.

Section 100 of Companies Act, provides for a company limited by shares or a company limited by guarantee and having a share capital subject to confirmation by the Tribunal, may, if so authorized by its articles, by special resolution, reduce its share capital in any way, and in particular and without prejudice to the generality of the foregoing power, may

(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up;

(b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets; or

(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company; and may, if and so far as is necessary alter its memorandum by reducing the amount of its share capital and of its shares accordingly.

 

Reduction of Share Capital without sanction of the Tribunal:

1. Surrender of Shares – It means the surrender of shares already issued to the company by the registered holder of shares. Where shares are surrendered to the company, whether by way of settlement of a dispute or for any other reason, it will have the same effect as a transfer in favour of the company and the amount to a reduction of capital.

The Companies Act contains no provision for Surrender of Shares. Thus surrender of shares is valid only when Articles of Association provide for the same and:

   A. Where forfeiture of such shares is justified

   B.  When shares are surrendered in exchange for new shares of same nominal value.

 

2. Forfeiture of Shares – A company may if authorized by its articles,   forfeit shares for non-payment of calls and the same will not require confirmation of the court. Where power is given in the Articles, it must be exercised strictly in accordance with the regulations regarding notice, procedure and manner stated therein; otherwise the forfeiture will be void. Forfeiture will be affected by means of Board resolution.

 

3. Diminution of Capital – Where the company cancels shares which have not been taken or agreed to be taken by any person.[Section 94(1)(3) ]

4. Redemption of redeemable preference shares

5. Purchase of shares of  a member by the company under Section 402

6.  Buy back of its own shares under Section 77A of companies Act.

 

Reduction of Capital when the Company is defunct

The Registrar of Companies has been empowered under Section 560 of Companies Act to strike off the name of defunct company from its register where he has reasonable cause to believe that a company is not carrying on business or in operation.

 

Reduction of Capital of Unlimited Company

An unlimited company to which Section 100 of Companies Act does not apply can reduce its capital in any manner that its MOA and AOA allow. It is not governed by Section 94 and 100 of Companies Act.

Creditors’ Right to obtain to Reduction

The creditors having a debt or claim admissible in winding up are entitled to object. To enable them to do so, the Court will settle a list of creditors entitled to object. If any creditor objects, then either his consent to the proposed reduction should be obtained or he should be paid off or his payment be secured. The Tribunal, in deciding whether or not to confirm the reduction will take into consideration the minority shareholders and creditors.(Section 101 of Companies Act)

 

Confirmation and Registration of Reduction

As per Section 102 of the Companies Act the Tribunal, if satisfied with respect to every creditor of the company who under Section 101 is entitled to object to the reduction, that either his consent to the reduction has been obtained or his debt or claim has been discharged, or has determined, or has been secured, may make an order confirming the reduction on such terms and conditions as it thinks fit.

Where the Tribunal makes any such order, it may if for any special reason it thinks proper so to do, make an order directing that the company shall, during such period commencing on, or at any time after, the date of the order, as is specified in the order, add to its name as the last words thereof the words "and reduced"

 

When a Diminution of Share capital is not a reduction of Share capital?

  1. Where the company cancels shares which have not been taken or agreed to be taken by any person [Section 94(1)(e) ]
  2. Where the redeemable preference shares are redeem – Section  80
  3. Where any shares are forfeited for non-payments of calls and such forfeiture amounts to reduction of capital
  4. Where the company buys – back its own shares under Section 77A

 

Liability of Members in respect of Reduction Share capital

On the reduction of Share Capital, the extent of the liability of any past or present member or any call or contribution shall not exceed the difference between the amount already paid on the share, or the reduced amount, if any, which is deemed to have been paid thereon by the member, and the amount of shares fixed by the scheme of the reduction.

 

 

 

 

 

 

 

 

 

 

 

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