REDUCTION OF SHARE CAPITAL-PROCEDURE BEFORE NCLT UNDER COMPANIES ACT, 2013

On 07th December, 2016, Ministry of Corporate Affairs (MCA) has vide its Commencement Notification notified various sections of Companies Act, 2013 which includes arbitration, compromise, arrangements and reconstruction and winding up companies which has come into force with effect from 15th December, 2016. The Section 66 which is the governing provision for Reduction of Share Capital of a company, is one amongst those sections notified on 07th December, 2016.

Immediately, thereafter, MCA has further, notified the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016 on 15th December, 2016.

Before delving into the procedure and manner through which reduction of share capital is carried as per NCLT Rules, let’s look at few questions for our insight, such as:

  • What is reduction of Share Capital?
  • What are the provisions of Reduction of Share Capital under Section 66 of the Companies Act, 2013?
  • What is procedure for reduction of share capital to be followed before the NCLT?

Previously, Reduction of Share Capital was governed under Section 100 of the Companies Act, 1956. As per the old Act, subject to the confirmation of the Court, a company limited by shares or company limited by guarantee and having share capital may, if authorised by its articles, by Special Resolution, reduce its share capital. Now, under new Act of 2013, the said powers of Court have been transferred to NCLT.

Let’s answer the above questions in detail:

WHAT IS REDUCTION OF SHARE CAPITAL?

The Reduction of Share Capital means reduction of issued, subscribed and paid up share capital of the company. A company may want to reduce its share capital in order to eliminate losses, return surplus capital to shareholders, assist a buyback or redemption of shares, or distribute assets to shareholders. Generally, eliminating losses is the main reason why a company reduces its share capital. A reserve arising from a reduction of capital can increase or create distributable reserves and reduce or eliminate losses.

Alternatively, a company can reduce capital to release a liability to pay up unpaid share capital.

Further, Buy back of shares and redemption of Preference Shares are also reduction of share capital but governed by specific provisions prescribed under Act. Such reductions in the form of buy back and redemption do not require sanction/approval from Tribunal.

PROVISIONS RELATING TO REDUCTION OF SHARE CAPITAL UNDER SECTION 66 OF THE COMPANIES ACT, 2013.

  • Reduction of capital to be approved by Special Resolution and confirmed by the Tribunal[Section 66(1)]:

Subject to the confirmation by the Tribunal on an application by the company, a company may by a Special Resolution, reduce share capital.

  • Companies limited by shares can reduce their share capital in one of the three ways:
  1. Extinguish or reduce the liabilities on any of its shares in respect of the share capital not paid up;
  2. Either with or without extinguishing or reducing liabilities on any of its shares, cancel any paid up share capital which is lost or unrepresented by available assets;
  • Either with or without extinguishing or reducing liabilities on any of its shares, pay off any paid up capital which is in excess of the wants of the company.
  • It may be noted that No reduction of capital would be allowed in case of Arrears in the repayment of Deposits and interest thereon. [Proviso to Section 66(1)].
  • Notice by Tribunal[Section 66(2)]:

The Tribunal shall give notice of every application made to it under Section 66(1) to:

  1. The Central Government;
  2. Registrar (ROC);
  • The Securities and Exchange Board of India (SEBI); and
  1. The Creditors of the company

It shall take into consideration, the representation made to it, if any, within three months from the date of receipt of notice. If no representation has been received within said period, it shall be presumed that they have no objections.

  • Confirmation of Reduction of Capital [Section 66(3)]:

The Tribunal may, if it is satisfied that the debt or claim of every creditor has been discharged or determined or has been secured or his consent is obtained, make an order confirming reduction of share capital on such terms and conditions as it deems fit.

  • No sanction for reduction of share capital shall be granted by NCLT unless the accounting treatment for the proposed reduction is complied with Accounting Standards and a certificate to that effect by the Company’s Auditor has been filed. [Proviso to Section 66(3)]
  • Publication of the order of the Tribunal [Section 66(4)]

The order of confirmation of the reduction of capital by the Tribunal shall be published by the company in such manner as Tribunal may direct.

  • Deliver a copy of order of Tribunal to Registrar [Section 66(5)]

The company shall deliver a certified copy of the order of the Tribunal under sub-section (3) and of minute approved by the Tribunal to the Registrar within 30 days of the receipt of order, who shall register the same and issue a certificate to that effect.

  • Liabilities of Members[Section 66(7) & (8)]

-On reduction of share capital, the extent of liabilities of any member shall not exceed the difference of the amount paid thereon or deemed to have been paid thereon and amount fixed by the scheme of reduction.

-If, any creditor entitled to object to the reduction of share capital is not entered in the list of creditors because of ignorance, and after reduction of share capital, company is unable to pay his debt or claim, then every member at the time of registration of order will be liable to contribute for the payment of debt to the creditor.

  • Penalty [Section 66(10)]

If any officer of the company knowingly conceal the name of creditor or misrepresent the nature of debt of the creditor, shall be liable under the provisions of fraud under Section 442.

  • Reduction of share capital under Section 242

Apart from reduction of capital under section 66, there is another circumstance, when 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 purchase of shares of any members by the company and consequent reduction of the share capital.

PROCEDURE FOR REDUCTION OF SHARE CAPITAL UNDER SECTION 66 READ WITH NCLT (PROCEDURE FOR REDUCTION OF SHARE CAPITAL) RULES, 2016

In view of the aforesaid provisions of the Act, company proposing to reduce its share capital is required to take following procedural steps:

  1. Convene a Board Meeting to approve the reduction of share capital and fixing the date of general meeting of the company.
  2. Hold the general meeting and have the Special Resolution
  • File MGT-14 with ROC within 30 days of passing of Special Resolution.
  1. Apply to NCLT by filing an application in Form RSC-1 alongwith prescribed fee of Rs.5,000/-to confirm reduction.
  2. The application shall be accompanied with:
  • List of creditors
  • Certificates of auditor to the effect that:
  • list of creditors is correct;
  • company is not in arears of repayment of deposit and interest thereon; and
  • Accounting Treatment proposed by the company for reduction of share capital is in conformity with the Accounting standards.
  1. The NCLT shall within 15 days of submission of the application give a notice to ROC and SEBI in Form RSC-2 and to every creditors of the company in Form RSC-3.
  • The NCLT shall also give direction for the notice to be published in Form RSC-4 within seven days of such direction in a leading English and vernacular language newspaper and for uploading on the website of the company.
  • The company shall file an affidavit in Form RSC-5 confirming the dispatch and publication of the notice within seven days from the date of issue of such notice.
  1. The NCLT may dispense with the requirement of giving notice to the creditors or publication of notice, if every creditor has been discharged or secured or given his consent.
  2. Representation by ROC, SEBI and creditors shall be sent to NCLT within 3 months of receipt of notice and copy of which shall also be sent to the company. If no such representation has been received by NCLT within the said period, it shall be presumed that they have no objection.
  3. Company shall send the representation or objections so received alongwith responses of the company thereto within 7 days of expiry of period upto which objections were sought.
  • NCLT may hold any enquiry on adjudication of claim and/or give direction for securing the debts of the creditors.
  • The order confirming the reduction of share capital shall be in Form RSC-6.
  • The company shall deliver a certified copy of the order of the NCLT under sub-section (3) and of minute approved by the Tribunal to the ROC and file E-form INC-28. within 30 days of the receipt of order.
  1. The ROC shall issue a certificate to that effect in Form RSC-7.

CONCLUSION:

A company by passing a Special Resolution and obtaining a sanction from NCLT after following proper procedure specified under NCLT rules, 2016, may reduce its share capital.

 

-CS Peer Mehboob

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PEER MEHBOOB | COMPANY SECRETARY

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