Companies Act Section 66

Companies Act Section 66: Reduction of Share Capital for Companies Limited by Shares or Guarantee

Overview of Share Capital Reduction and Requirements for Tribunal Approval

Section 66 of the Companies Act outlines the procedures and requirements for companies limited by shares or by guarantee (and having share capital) to reduce their share capital. 

This section mandates that any reduction in share capital must be confirmed by the Tribunal, ensuring transparency and accountability in handling such transactions. 

Through special resolutions, companies can seek to reduce or extinguish liabilities associated with their shares, manage excess capital, or make other adjustments to align with their financial strategy. 

However, these actions require adherence to a strict framework, including notification to the Tribunal and relevant authorities, creditor consideration, and conformity with established accounting standards.

Key Provisions and Actions Permitted Under Section 66

Reduction of Share Capital by Special Resolution and Tribunal Confirmation

1. Resolution for Capital Reduction:

A company that is either limited by shares or by guarantee with share capital can opt to reduce its share capital. This reduction must be authorized by a special resolution passed by the shareholders, outlining the specific reasons and methods for capital reduction.   

2. Tribunal’s Confirmation:

Upon passing the resolution, the company must apply to the Tribunal for confirmation of the proposed capital reduction. This application initiates a formal review process, ensuring that all legal and regulatory requirements are met.

Methods of Reducing Share Capital

Section 66 permits several approaches to reducing share capital, as listed below:

Extinguishment or Reduction of Share Liability:

The company may choose to extinguish or reduce its unpaid liability on shares that remain unpaid. This means that shareholders’ responsibility to contribute additional funds for those shares may be decreased or removed.   

Cancellation of Paid-Up Share Capital Not Represented by Available Assets:

If certain portions of the paid-up capital are unrepresented by the company's assets (often due to financial losses or asset depreciation), the company may cancel this capital. 

This cancellation process helps companies correct their balance sheets and align share capital with actual asset representation.   

Return of Excess Paid-Up Share Capital:

Companies can also return paid-up share capital that exceeds the company’s operational needs. This involves paying off shareholders for the excess amount, effectively reducing the company’s share capital by modifying the memorandum accordingly.

Restrictions on Reduction of Share Capital

A company may not reduce its share capital if it has pending repayments on deposits accepted, either before or after the commencement of the Act, including any interest obligations on these deposits.

This restriction safeguards depositors by ensuring that companies prioritize repayment obligations over capital reduction.

Tribunal Notifications and Creditor Considerations

Upon receiving an application to reduce share capital, the Tribunal is required to notify key stakeholders, allowing them to make representations within a three-month window:

Notifying the Central Government, Registrar, SEBI, and Creditors:

In cases involving listed companies, the Tribunal will notify the Central Government, the Registrar, the Securities and Exchange Board of India (SEBI), and the company’s creditors of the application for share capital reduction.

This notification provides stakeholders an opportunity to assess and voice any concerns regarding the company’s proposal.   

Presumption of No Objections:

If no objections are raised within the designated three months, it is presumed that the notified entities have no objections, and the Tribunal may proceed with the review.

Tribunal’s Approval and Creditor Protections

The Tribunal will confirm a company’s reduction of share capital only if it is satisfied that all creditors’ claims have been addressed. Creditors must either have their claims settled, be given security for outstanding debts, or give explicit consent.

Additionally, the company’s accounting treatment of the reduction must align with the accounting standards specified in the Act, ensuring compliance with sound financial reporting practices. A certificate from the company’s auditor confirming this alignment must be filed with the Tribunal.

Final Steps Post-Tribunal Approval

Once the Tribunal confirms the reduction, the following steps are required:

Public Announcement of Reduction:

The Tribunal will direct the company to publish notice of the confirmed reduction, detailing its revised share capital structure. This publication provides transparency for shareholders and other stakeholders regarding the change.   

Submission of Certified Documents to the Registrar:

The company must submit a certified copy of the Tribunal’s confirmation order, along with a detailed minute specifying:

Amount of Share Capital

Number and Value of Shares

Details on Paid-Up Capital

These documents must be filed with the Registrar within 30 days of receiving the Tribunal’s order, who will register and issue a certificate reflecting the reduced share capital.

Exemptions and Limitations

Exclusion for Buy-Backs

The provisions outlined in Section 66 do not apply to the buy-back of a company’s own securities, which is governed by Section 68 of the Act. Buy-backs are separate actions that require distinct processes and approvals.

Limited Liability on Share Calls After Reduction

Once share capital has been reduced under Section 66, shareholders cannot be held liable for amounts beyond what has been explicitly specified by the Tribunal. This provision limits their liability strictly to the redefined capital structure.

Protections for Creditors Unaware of Reduction Proceedings

If a creditor was unaware of the capital reduction process due to ignorance of the proceedings or lack of adequate information, and the company defaults on its debt obligations, the following measures apply:

Member Contributions:

Members (both current and former) who were shareholders at the time of reduction may be required to contribute towards the debt, up to an amount equal to their original contribution before the capital reduction.

Creditors’ Rights in Winding-Up Proceedings:

If the company is subsequently wound up, creditors can apply to the Tribunal to establish a list of those shareholders liable to contribute to the debt, ensuring they are treated as contributories in the liquidation process.

Liability of Company Officers for Concealment of Creditor Information

If any officer of the company knowingly conceals creditor information or misrepresents creditor claims in the reduction proceedings, they may face significant penalties under Section 447 of the Act. 

This includes any form of concealment, misrepresentation, or collusion in suppressing information relevant to creditor claims.