Companies Act Section 100 to 104.

Transcription

1 Companies Act Section 100 to 104. After the raising of share capital by issuing shares, the Companies Act gives a company the liberty to adapt to its changing circumstances. Hence, Section 100 of the Companies Act provides that a company can reduce its share capital in any manner. The following three instances of reduction of share capital as enumerated in Section 100 are only indicative and without prejudice to the generality of this power of the company: (i) Reducing or altogether extinguishing the paid-up value of shares (ii) Reducing nominal as well as paid-up value of shares Need The need for reducing the capital may arise on account of various reasons like to distribute assets to shareholders, to remedy deficit, to reduce the basis for taxes, make up for trading losses, heavy capital expenses, etc. Also, sometimes companies may have more capital resources and reserves than they can profitably employ, giving rise to the need to readjust the relation between capital and assets by reduction of capital. When a company has been making losses, the financial position does not present a true and fair view of the state of the affairs of the company. The assets are overvalued, and assets side of the balance sheet consists of fictitious assets with debit balance in profit and loss account. Such situation does not depicit what a real net worth ought to be. In short, the company is over capitalized. Such a situation brings the need for reconstruction. Here, scheme of reduction will be to write-off that portion of capital which is already lost and to make balance sheet healthy. Reconstruction is a process by which affairs of a company are reorganized by revaluation of the assets, reassessment of liabilities and by writing off the losses already suffered by reducing the paid up of shares and or varying rights attached to the

2 different classes of shares. The object of the reconstruction is usually to recognize capital or to compound with creditors or to effect economies. Such a process is called as Internal Reconstruction which is carried out without liquidating the Company. The aforesaid comprise is an agreement between a company and its members and outside liabilities when the company faces financial problems. Such arrangement involves sacrifice from shareholders or creditors or by all. Accounting effect of the scheme along with other is detailed below. However, there may be external reconstruction which is altogether different and involves liquidation of the Company. Accounting Entries (1) Being Amount Written Off From Share Capital Account Share Capital Account (2) Being Reserves Utilized For Capital Reduction Scheme Reserve Account (3) Being Amount Written Off From Accumulated Losses Profit & Loss Account (4) Being Amount Written Off On Assets On Revaluation Various Relevant Assets

3 (5) Being Surplus Upon Revaluation Of Assets Various Relevant Assets (6) Being shares issued to settle liabilities Various Relevant Liabilities (7) Being new shares issued in lieu of preference dividends in arrears Share Capital Account (8) Being expenses incurred during the Capital Reduction. Cash/Bank Account (9) Being difference(rounding) re: net credits transferred to Capital Reserve Account. Capital Reserve Account Procedures Sl. no. Procedure to be carried out Time limit Documents etc required 1. Prepare Scheme of Reduction of Capital Scheme of reduction 2. Hold the Board meeting Notice of the Board Meeting Minutes of the Board Meeting Certified True copies of resolutions.

4 3. Convene the EGM After 23 days from the Board Meeting. Notice calling the EGM EGM can be convened on shorter notice subject to consent of 95% of Shareholders. Certified True Copy of the Altered Articles of Association of the Company 4. File the petition as per the Companies (Court) Rules 1959 Petition (F 18) Affidavit Verifying Petition (F 3) Scheme of Reduction List of creditors (F 21) Affidavit Verifying List of creditors (F 22) 5. File Form 23 Within 30 days EGM Notice calling the EGM Certified True Copy of the Altered Articles of Association of the Company Applicable Filing Fees Digital Signature of the Director 6. On filing of the above documents with court, if the High Court is satisfied that the

5 proposed reduction does not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid-up share capital then he will fix a date for hearing of the petition and give such directions as he may think fit as to the advertisement of the petition. 7. Publish the notice of petition plus notice of presentation of list of creditor Notice of Petition (F 5) Notice of presentation of list of creditors (F 23) Standard advertisement (Form 24) 8. Send notice of petition to all the shareholders, creditors and others as the company may decide 9. File affidavit with the court on service of petition Notice of petition (F 6) Affidavit (F 7 and F 25) Proof of delivery (Eg. Registered post receipts etc) 10. The Company has to comply with all the directions, if any, as issued by the Court in respect of the reduction of capital of the Company 11. Intimate Court that all the directions have been complied with 12. If any person replies to the aforesaid notice/ advertisement, then the lawyer / company should maintain track of the same and file the result of the notices plus affidavit, with Court 13. Enter into settlement with creditors / persons who claim to be creditors and prepare the certificate of settlement and file the same with the court 14. The court may call for the hearing to determine that the creditors are paid off / their claim is settled / secured. Give advertisement on the date of hearing of the petition Result of Notices Affidavit (F 26) Certificate on result of settlement of the list of creditors Advertisement of hearing of petition (F 29) 15. If the Court is satisfied that all the directions have been complied with by the Company and the creditors / persons who claim to be

6 creditors are duly settled, the Judge may confirm the reduction on such terms and conditions as he may think fit and issues an order confirming the reduction of the capital 16. On receipt of the order, file the order with ROC, Mumbai. Form 21 The photocopy of the order confirming the reduction. 17. Make application to the bank for realizing the term deposit Application in bank format Copy of the order of the court Any other document as required by the bank 18. Take back the old share certificates and destroy them 19. Make entries in the statutory registers Statutory registers 20. Comply with other directions of the court (if any)