Section 66: Reduction of Share Capital

Introduction

Section 66 of Companies Act, 2013, is part of chapter IV. It primarily lays down and discusses the nitty gritties with respect to reduction of share capital of a company. This section sets forth steps for a company to reduce its share capital and provide disclosures for the same. This must be adhered by every company reducing its share capital. A reduction of share capital is unlawful except when sanctioned by the tribunal. The share capital of the company is the only security that the creditors rely on as any reduction of this share capital diminishes the fund out of which they are to be paid, and hence is closely guarded. But section 66 of the act, 2013 gives closely fenced power for reduction of share capital, for general necessity. This analysis will provide in-depth knowledge about the procedure and disclosure requirements for reduction of share capital along with important judicial pronouncement on the same.

Purpose of Section 66

This section lays down the provisions that must be followed by a company for reduction of its share Capital. This section briefly lays down following:

A company limited by shares or limited by guarantee and having a share capital, may by special resolution and subject to confirmation by tribunal reduce its share capital. Under section 100 of the 1956 Act, a company could reduce its share capital provided there is an authorization in the articles. This provision has not been specified in the present section.
A company can reduce its share capital by: (1) reducing or extinguishing the liability on any of its shares not paid-up (2) with or without extinguishing or reducing liability on any of its shares (3) cancelling any paid up capital which is lost or is unrepresented by available assets (4) paying off any paid-up share capital which is in excess of wants of the company and accordingly alter its memorandum of association by reducing the amount of its share capital and of its shares.
The process relating to reduction of share capital will now be handled by the NCLT instead of by the court under the 1956 Act.
No reduction of share capital 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 the act, 2013 or the interest payable thereon.
The Tribunal shall give notice of the application made for reduction of capital to the Central Government, Registrar, SEBI, and the creditors of the company and shall consider the representations received in this behalf within a period of three months from the date of receipt of the notice. Where no representation has been received, it shall be presumed that they have no objection to the reduction of share capital. The power to serve notice here, has been delegated to the regional director [1].
The tribunal, if 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, shall make an order confirming the reduction of share capital on such terms and conditions as it deems fit.
No application for reduction of share capital shall be sanctioned by the tribunal 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 provision of this Act and a certificate to that effect by the company’s auditor has been filed with the tribunal.
Once the tribunal confirms the reduction, the order of confirmation shall be published by the company in such manner as the tribunal may direct. It has now become mandatory for the company to publish the order confirming reduction of capital. Under the 1956 Act, this power was discretionary.
The company shall deliver a certified copy of the order of the tribunal and of a minute approved by the tribunal to the registrar within thirty days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect. The section now prescribes the time limit of 30 days within which order of Tribunal for reduction is required to be filed with the registrar.
Provision for reduction of capital shall not apply to buy-back of its own securities by a company.
If any officer of the company knowingly conceals the name of any creditor entitled to object to the reduction or 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, he shall be liable for fraud under section 447.
If the company publishes the order of the tribunal in contravention to the procedure as provided under this section, it shall be punishable with fine.
A past or present member of the company shall not be liable for a call or contribution in excess of the difference between the amount/ reduced amount deemed to have been paid up and the amount of share as fixed by the reduction order.

This section must be read with National Company Law Tribunal (Procedure for reduction of share capital of company) Rules, 2016. The important rules are as follows:

An application to the tribunal to confirm a reduction of share capital of a company must be in form no. RSC-1 along with a fee of Rs. 5000 accompanied by following documents : (a) the list of creditors duly certified by the Managing Director, or in his absence, by two directors, as true and correct, which is made as on a date not earlier than fifteen 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 (b) 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 (c) 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 (d) 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 Act.
Copies of the list of creditors shall be kept at the registered office of the company and any person desirous of inspecting the same may, at any time during the ordinary hours of business, inspect and take extracts from the same on payment of the sum of rupees fifty for inspection and for taking extracts on payment of the sum of rupees ten per page to the company[2].
The Tribunal have to within fifteen days of submission of the application give notice to (i) the Central Government, Registrar of Companies (RoC), in all cases, in Form No. RSC-2 (ii) the Securities and Exchange Board of India, in the case of listed companies in Form No. RSC-2 (iii) the creditors of the company, in all cases in Form No. RSC-3, seeking their representations and objections, if any[3].
The tribunal shall give directions for the notice to be published, in Form No. RSC-4 within seven days from the date on which the directions are given, in English language in a leading English newspaper and in 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.
The company or the person who was directed to issue notices and the publication in the newspaper shall, as soon as may be, but not later than seven days from the date of issue of such notices, file an affidavit in Form No. RSC-5 confirming the dispatch and publication of the notice.
If the authorities or the creditors of the company desire to make any representation under sub-section (2) of section 66, the same shall be sent to the Tribunal within a period of three months from the date of receipt of notice and copy of such representation shall simultaneously be sent to the company and in case no representation has been received within the said period by the Tribunal it shall be presumed that they have no objection to the reduction[4].
The company have to 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 and then the Tribunal may give such directions as it may think fit with respect to holding of any enquiry or adjudication of claims or for hearing the objection[5].
Where the tribunal makes an order confirming a reduction, the order confirming the reduction and approving the minute may include such directions or terms and conditions as the Tribunal deems fit and such order shall be in Form No. RSC-6 and the Certificate issued by the Registrar under sub-section (5) of section 66 shall be in Form No. RSC-7[6].

Situation Before Enactment of Section 66

This section corresponds to section 100 (Special resolution for reduction of share capital), section 101 (Application to tribunal for confirming order, objections by creditors, and settlement of list of objecting creditors), section 102 (Order conforming reduction and powers of tribunal on making such order), section 103 (Registration of order and minute of reduction), section 104 (Liability of members in respect of reduced shares) and section 105 (Penalty for concealing name of creditor, etc.) of the 1956 Act.

The provisions contained under the new act are like the provisions contained under the old act; however, some procedural changes have been introduced. Taking a cue from the requirements prescribed under the listing agreement, the new cut provides that upon an application of reduction filed in the tribunal, the tribunal has to give notice of such application to the Central Government, RoC, SEBI (in case the company is listed) and the creditors; and in case no representation is received within thirty 30 days, then, it shall be presumed that they have no objection to the said reduction.

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The tribunal will not sanction any reduction unless the accounting treatment proposed by the company in relation to such reduction is in confirmation with the relevant accounting standards specified under the new act and a certificate to that effect is received from the company’s auditor. The new act removes the requirement of the words “and reduced” being added to the name of the company post reduction. The new act provides that reduction of capital is not permitted if the company is in arrears of repayment of deposits or interest payable thereon. Thirty-day period has been provided under the new act for filing the tribunal’s order in respect of reduction with the RoC. Order for publishing the reasons and confirming the reduction has been made mandatory.

Power or tribunal to waive the requirement of consent of creditors in case of reduction of capital by way of diminution of any liability in respect of any unpaid share capital or the payment to any shareholder of any paid-up share capital, has not been provided for under the new act. The penalties in respect of non-compliance have been made more stringent.

Application of Section 66

This section basically comes into application when any company wants to reduce its share capital. The procedure and disclosures as per this section and NCLT rules have to be followed compulsorily by the companies who want to reduce their share capital.

Amendment

This section has not been amended till now. By way of enforcement of Insolvency and Bankruptcy Code, 2016 there was a substitution done under clause 8 of this section, to now refer to default as within the meaning of IBC and not companies act under section 271(2).

Cases at a Glance

Barry Artist Ltd., re [7]: Here the court allowed reduction of share capital on the basis of resolution signed by all the members without a formal meeting. The court however issued this warning that the practice should not be repeated.
Birla Global Finance Ltd., in re [8]: In this case the court held that the redemption of preference shares is nothing but repayment of the preference capital and amounts to reduction of share capital.
Cosmosteels Pvt. Ltd. v. Jairam Das Gupta[9]: Here court held that when a direction for purchase of shares is given by the court under section 402 of the 1956 Act (Power of company law board on application for oppression and mismanagement), and consequent reduction in share capital is to be effected, the procedure for reduction of share capital need not be followed.
Sandvik Asia Ltd. v. Bharat Kumar Padamsi[10]: Here the court held that once it is established that non-promoter shareholders are being paid for value of their shares, and an overwhelming majority of them have voted in favor of resolution for reduction of share capital, the court will not be justified in withholding the sanction to the resolution.
Marwari Stores Ltd. v. Gouri Shanker Goenka [11]: The duty of the court is to look after the interest of the shareholders. The proposed scheme of reduction must be fair and reasonable between all the classes of shareholders in the company. If the capital of the company consists of only one class of shares and all of them are to bear the reduction proportionately the scheme is obviously fair and must be confirmed. In this case the defendant company has a capital of Rs. 1,92,000 divided into 1920 shares of Rs. 100 each. By a special resolution the company resolved to reduce the share capital to half. In other words, the paid-up share capital was to be cancelled to the extent of Rs. 50 on each share. The petitioner, a shareholder opposed the reduction on the ground that there has been no loss of capital and therefore the reduction was unwarranted. The court here held it is not necessary that the scheme of reduction will only be confirmed on the proof of the fact that there has been a real loss of capital but on the fact that the company seeking the reduction has duly passed a special resolution to that effect.

Concluding Summary

There can be necessary circumstances where a company needs to reduce its share capital, and section 66 of the company’s act provides a guarded mechanism for the same. Reducing the share capital of a company directly affects the creditors and as such it is a procedure heavily regulated and a lot of disclosures by the company is required. It is very important that procedures as given under this section along with NCLT rules, 2016 be followed by the company, for a valid reduction of shares.

Also Read Herdilia Unimers Ltd. V Renu Jain Case

[1] M.C.A SO 2938 (E) dated 6th September 2017.

[2] NCLT (Procedure for reduction of share capital of company) Rules, 2016, r. 2 (MCA).

[3] NCLT (Procedure for reduction of share capital of company) Rules, 2016, r. 3 (MCA).

[4] NCLT (Procedure for reduction of share capital of company) Rules, 2016, r. 4 (MCA).

[5] NCLT (Procedure for reduction of share capital of company) Rules, 2016, r. 5 (MCA).

[6] NCLT (Procedure for reduction of share capital of company) Rules, 2016, r. 5 (MCA).

[7] Barry Artist Ltd., re (1985) 1 WLR 1305.

[8] Birla Global Finance Ltd., in re (2004) 58 CLA 154 (Bom.).

[9] Cosmosteels Pvt. Ltd. v. Jairam Das Gupta (1978) 48 Comp Cas 312.

[10] Sandvik Asia Ltd. v. Bharat Kumar Padamsi (2209) 91 CLA 247 (Bom.)

[11] Marwari Stores Ltd. v. Gouri Shanker Goenka AIR 1936 Cal 327.