PROCEDURE FOR REDUCTION OF SHARE CAPITAL UNDER COMPANIES ACT, 2013

[DR.MARIAPPAN GOVINDARAJAN]

Reduction of share capital

Section 66 of Companies Act, 2013 (‘Act’ for short) provides the procedure for the reduction of share capital.  This section corresponds to Sections 100 to 105 of the Companies Act, 1956.  This section came into effect from 15.12.2016.  The Central Government for the purposes of this Section makes ‘The National Company Law Tribunal (Procedure for reduction of share capital of Company) Rules, 2016 (‘Rules’ for short) which came into effect from 15.12.2016.

A company limited by shares or limited by guarantee and having share capital may reduce the share capital of the company in any manner by passing a special resolution.  The reduction of share capital may-

• extinguish or reduce the liability of any of its shares in respect of the share capital not paid up; or
• either with or without extinguishing or reducing the liability on any of the shares-

• cancel any paid up share capital which is lost or is unrepresented by available assets; or
• pay off any paid up share capital which is in excess of the wants of the company,

alter its memorandum by reducing the amount of its share capital and of its shares accordingly. 

No such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon.

Filing application before Tribunal

Rule 2(1) provides that an application to confirm a reduction of share capital of a company, shall be filed before the National Company Law Tribunal (‘Tribunal’ for short) in Form No. RSC-1.  The fee payable is ₹ 5,000/-.

The application shall be accompanied with the following-

• the list of creditors duly certified by the Managing Director of the Company; in his absence, the list shall be certified by two directors as true and correct, which is made as on a date not earlier than 15 days prior to the date of filing of an application showing the details of the creditors of the company, class wise, indicating their names, addresses and amounts owed to them;
• a certificate from the auditor of the company to the effect that the list of creditors is correct as per the records of the company verified by the auditor;
• a certificate by the auditor and declaration by a director of the company that the company is not, as on the date of filing of the application, in arrears in the repayment of the deposits or the interest thereon; and
• a certificate by the company’s auditor to the effect that the accounting treatment proposed by the company for the reduction of share capital is in conformity with the accounting standards specified in Section 133 or any other provisions of the Act.

Copy of list of creditors

Rule 2(3) provides that copies of the list of creditors shall be kept at the registered office of the company.  Any person desirous of inspection the same may inspect and take extracts from the same at any time during the ordinary hours of business of the company.  A sum of ₹ 50/- is payable for inspection is payable.  A sum of ₹ 10/- is payable per page for taking extracts of the list.

Issue of notice

Section 66(2) read with Rule 3 provide that the Tribunal shall, within 15 days of submission of the application, give notice, or direct that notice to be given to-

• the Central Government, Registrar of Companies, in all cases, in Form No. RSC – 2;
• the Securities and Exchange Board of India, in the case of listed companies in Form No. RSC-2;
• the creditors of the company in all cases in Form No. RSC -3

seeking their representations and objections, if any.

The notice to the creditors shall be sent, within 7 days of the direction given by the Tribunal or such other period as may be directed by the Tribunal to each creditor, whose name is entered in the list of creditors submitted by the company.  The notice shall state about the presentation of the application and the amount of the proposed reduction of share capital and the amount or estimated value or the debt or the contingent debt or claim or both for which such creditor’s name is entered in the said list and the time within which the creditor may send his representations and objections.

Advertisement

Rule 3(3) provides that the Tribunal shall give directions for the notice to be published in Form No. RSC-4 within 7 days from the date on which the directions are given.  The advertisement shall be given in English language in a leading English newspaper and a leading vernacular language newspaper both having wide circulation in the State in which the registered office of the company is situated or such newspapers as may be directed by the Tribunal and for uploading on the website of the company, if any, seeking objections from the creditors and intimating about the date of hearing.

Rule 3(4) provides that the notice shall state the amount of the proposed reduction of share capital and the places where the list of creditors may be inspected and the time fixed by the Tribunal within which the creditors of the company may send their objections.

Rule 3(5) provides that the company or the person who was directed to issue notice and the publication in the newspaper shall, as soon as may be, but not later than 7 days from the date of issue of such notices, file an affidavit in Form RSC – 5 confirming the dispatch and publication of the notice.

Dispensing with the notice

Rule 3(6) provides that where the Tribunal is satisfied that the debt or claim of every creditor has been discharged or determined or has been secured or his consent is obtained, it may dispense with the requirement of giving of notice to creditors or publication of notice under this rule or both.

Objections by authorities or creditors

Rule 4 provides that if the authorities or the creditors of the company desire to make any representation, the same shall be sent to the Tribunal within 3 months from the date of receipt of notice.  The copy of such representation shall simultaneously be sent to the company.  In case no representation has been received from the Central Government, Registrar, SEBI or the creditors, by the Tribunal, within the said period it shall be presumed that they have no objection to the reduction.

Company to represent

Rule 5 provides that the company shall submit to the Tribunal, within seven days of expiry of period up to which representations or objections were sought, the representations or objections so received along with the responses of the company thereto.  The Tribunal may give such directors with respect to holding of any enquiry or adjudication or claims or for hearing the objection or otherwise.

At the hearing of the application, the Tribunal may give such directions as may deem proper with reference to securing the debts or claims of creditors who do not consent to the proposed reduction, and the further hearing of the petitioner maybe adjourned to enable the company to comply with such directions.

Order of the Tribunal

According to Section 66 (3) read with Rule 6(1)  the Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital on such terms and conditions as he thinks fit.

The order confirming the reduction of share capital and approving the minute shall be in Form No. RSC-6 on such terms and conditions as may be deemed it. 

The Tribunal shall not sanction an application for reduction of share capital unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in Section 133 or any other provisions of the Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal.

Filing the order with Registrar

Section 66(5) provides that the company shall deliver a certified copy of the order of the Tribunal and of a minute approved by the Tribunal, showing-

• the amount of share capital;
• the number of shares into which it is to be divided;
• the amount of each share; and
• the amount, if any, at the date of registration deemed to be paid up on each share,

to the Registrar within 30 days of the receipt of the copy of the order, who shall register the same and issue a certificate in Form No. RSC – 7 to that effect. 

Non applicability

Section 66 shall not apply to a buyback of its own securities by a company under Section 68.

Liability of member

Section 66(7) provides that a member of the company, past or present, shall not be liable to any call or contribution in respect of any share held by him exceeding the amount of difference, if any, between the amount paid on the share, or reduced amount, if any, which is to be deemed to have been paid thereon, as the case may be, and the amount of the share as fixed by the order of reduction.

Section 66(8) provides that where the name of any creditor entitled to object to the reduction of share capital is, by reason of his ignorance of the proceedings for reduction or of their nature and effect with respect to his debt or claim, not entered on the list of creditors and after such reduction, the company is unable to pay the amount of his debt or claim-

• every person, who was a member of the company on the date of registration of the order for reduction by the Registrar shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount which he would have been liable to contribute if the company had commenced winding up on the day immediately before the said date; and
• if the company is wound up, the Tribunal may, on the application of any such creditor and proof of his ignorance, if it thins fit, settle a list of persons so liable to contribute and make and enforce calls and orders on the contributories settled on the list, as if they were ordinary contributories in a winding up.

Penalty

Section 66(10) provides that if any officer of the company-

• knowingly conceals the name of any creditor entitled to object to the reduction;
• knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
• abets or is privy to any such concealment or misrepresentation as aforesaid,

he shall be liable under Section 447.

Section 447 provides punishment for fraud.  The said section provides that without prejudice to any liability including repayment of any debt under the Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.  Where the fraud in question involves, the term of imprisonment shall not be less than three years.

If the company fails to comply with the provisions of Section 66(4), it shall be punishable with fine which shall not be less than ₹ 5 lakhs which may extend to ₹ 25 lakhs.