Financial Restructuring
FINANCIAL CORPORATE RESTRUCTURING
Corporate financial restructuring refers to any significant change in a company’s financial structure.
Such changes may relate to:
Debt structure.
Equity structure.
Ownership or control,
Business portfolio.
The primary objective of financial restructuring is to increase the overall value of the firm.
It typically involves debt restructuring, equity restructuring, or a combination of both
Financial restructuring is undertaken to improve financial stability, profitability, and long-term viability of the company.
INTERNAL RECONSTRUCTION
Internal reconstruction is the simplest form of financial restructuring.
Under internal reconstruction, the company reorganizes its finances without liquidating or forming a new entity
It involves reduction or rearrangement of liabilities through negotiations with stakeholders such as:
Banks.
Financial institutions.
Creditors.
Debenture holders.
Shareholders.
The process focuses on restructuring the capital base, such as reduction of share capital or conversion of debt into equity.
It also aims at raising fresh finance to support new projects or revival of operations.
DEBT RESTRUCTURING
It involves a reduction of the company’s debt burden to make repayments manageable.
The process may include an extension of repayment periods or a change in the existing terms and conditions of loans.
Such restructuring is generally less expensive than raising fresh capital or liquidation.
It essentially involves negotiation with bankers, creditors, and vendors.
The objective is to arrive at mutually acceptable repayment terms.
This process is known as debt restructuring.
Debt restructuring also involves reorganizing the entire debt capital of the company.
It requires reshuffling items on the balance sheet, especially those relating to debt obligations.
The debt capital of a company includes:
Secured long-term borrowings.
Unsecured long-term borrowings.
Short-term borrowings.
Through debt restructuring, the company aims to improve liquidity, reduce financial stress, and restore financial stability.
Restructuring of secured long-term borrowings
It Involves modifying the terms of loans secured against assets of the company.
For a sick or financially distressed company, it helps improve liquidity and increase cash flows by reducing repayment pressure.
The measures may include extension of loan tenure, reduction in interest rate, moratorium on repayments, or conversion of debt into equity.
For financially healthy companies, such restructuring helps in reducing the overall cost of capital and improving financial efficiency.
Restructuring of unsecured long-term borrowings
It Involves revising repayment terms of loans and debentures not backed by security.
It is typically achieved through negotiation with unsecured creditors and debenture holders.
It may include rescheduling of payments, reduction in interest, or partial waiver of dues.
The aims is to ease long-term financial obligations and strengthen the company’s balance sheet.
Restructuring of long-term unsecured borrowings
Such borrowings may be in the form of public deposits or private unsecured loans
It may also include privately placed unsecured bonds or debentures.
Restructuring generally involves renegotiating interest rates, extending repayment tenure, or rescheduling installments.
The objective is to reduce long-term financial pressure and improve balance-sheet stability.
Restructuring of short-term borrowings
Short-term borrowings are usually not formally restructured due to their brief tenure.
However, they can be renegotiated with revised terms and conditions.
These borrowings typically include:
Inter-corporate deposits.
Clean bills.
Clean overdrafts
Renegotiation helps manage immediate liquidity needs without altering long-term capital structure.
Debt-equity swap as a method of corporate debt restructuring
Debt-equity swap is considered one of the most effective methods of corporate debt restructuring.
Under this method, debt or bonds are converted into equity shares of the same company.
Specified creditors or bondholders are given the right to exchange debt for shares at a predetermined ratio.’
This reduces the company’s debt burden and interest obligations.
It also strengthens the equity base and improves the company’s debt-equity ratio.
Creditors, in turn, become shareholders, sharing future risks and rewards of the company.
Example :
Gammon India Ltd invoked the Strategic Debt Restructuring (SDR) mechanism during 2015–2016 to address its financial stress.
Under the SDR framework, a consortium of 16 banks, led by ICICI Bank, decided to convert a portion of their outstanding loans into equity.
As a result of this conversion, the lenders collectively acquired 63.07% equity stake in Gammon India, effectively taking control of the company.
The SDR Scheme was introduced as an improved version of the earlier Corporate Debt Restructuring (CDR) mechanism.
SDR empowered lenders to change management of companies whose assets had turned non-performing (NPAs), with the objective of improving recovery.
Despite acquiring control, the lenders were unable to find a single buyer for Gammon India as a whole.
Consequently, the company was restructured into three separate business verticals:
Power Transmission & Distribution (T&D).
Engineering, Procurement & Construction (EPC).
The residual business.
The EPC assets were acquired by the GP Group, a Thailand-based group.
A stake in the T&D business was acquired by Ajanma Holdings.
EQUITY RESTRUCTURING
It is a process of reorganizing the equity capital of a company.
Equity restructuring involves a reshuffling of shareholders’ capital and the reserves and surplus shown on the balance sheet.
It focuses on altering the structure of ownership and claims of shareholders
Restructuring equity means changing the manner in which residual cash flows of the firm are allocated and distributed among shareholders.
The primary objective is to increase the overall market value of the company’s common (equity) stock.
Such restructuring may include actions like:
Capital reduction.
Share consolidation.
Conversion of preference shares.
Issue of new equity.
Restructuring of equity and preference capital is a complex process.
It involves legal procedures and statutory approvals
Equity restructuring is a highly regulated area, requiring compliance with company law, securities regulations, and court or tribunal approvals.
The process aims to create a more efficient capital structure and enhance shareholder value.
The following comes under equity restructuring:
Alteration of share capital
Reduction of share capital
Buy-back of shares.
Alteration of Share Capital
The capital of a company is divided into units of fixed denomination, and each such unit is called a share.
A share represents an interest of a shareholder in the share capital of the company.
The term Share includes stock, as defined under Section 2(84) of the Companies Act, 2013.
Alteration of share capital refers to any change in the structure of a company’s share capital
Such alteration may involve:
Increase in share capital.
Decrease in share capital.
Rearrangement of existing share capital.
Alteration of share capital can be carried out only if permitted by the Articles of Association (AOA) of the company.
A company may increase or reduce its share capital based on its financial or business requirements.
These changes lead to a modification in the capital structure of the company.
Alteration of share capital is a strategic decision taken to meet funding needs, improve financial flexibility, or reorganize ownership.
Section 61 of the Companies Act, 2013 states that a limited company having a share capital derives its power to alter its share capital through its AOA.
Accordingly, if authorized by its Articles, the company may, in a general meeting, alter its Memorandum of Association to:
Increase of authorised share capital
The company may increase its authorised share capital by such amount as it considers necessary.
This enables the company to issue additional shares in the future to raise funds.
Consolidation and division of share capital
The company may consolidate and divide all or any part of its share capital into shares of a larger face value than the existing shares.
In accordance with Section 61(1)(b):
A company may consolidate (combine) or divide (split) its share capital.
Sometimes, this exercise can change the voting power of shareholders (for example, one group ends up with more or less voting rights than before).
If the voting percentage of any shareholder changes, the company cannot implement the consolidation or division on its own.
In such a case, the company must:
Apply to the Tribunal (NCLT).
Follow the prescribed legal procedure.
Obtain the Tribunal’s approval.
Only after approval can the change take legal effect.
Conversion of shares into stock and reconversion
The company may convert fully paid-up shares into stock.
Such stock may later be reconverted into fully paid-up shares of any denomination.
Sub-division of shares
The company may sub-divide its shares into shares of a smaller denomination than that specified in the Memorandum
The proportion between the amount paid and unpaid on each subdivided share must remain the same as it was in the original share.
Cancellation of unissued shares
The company may cancel shares which, at the date of passing the resolution, have not been taken or agreed to be taken by any person.
The share capital is reduced by the amount of shares so cancelled.
Effect of cancellation of shares
The cancellation of shares under this section shall not be deemed to be a reduction of share capital.
A company cannot issue shares beyond its authorised share capital.
INCREASE OF AUTHORISED SHARE CAPITAL AND TRIBUNAL APPROVAL FOR CHANGES IN VOTING RIGHTS
If a company proposes to increase its share capital beyond the existing authorised limit, it must :
First increase its authorised share capital by the required amount.
Such increase can be carried out only after altering the capital clause of the Memorandum of Association.
Authorised capital means the maximum amount of share capital that a company is permitted to issue, as stated in its Memorandum of Association.
It acts as a statutory ceiling on the issue of shares by the company.
Any issue of shares in excess of authorised capital is invalid unless the authorised capital is increased first.
TRIBUNAL APPROVAL FOR CONSOLIDATION OR DIVISION AFFECTING VOTING RIGHTS
In cases of consolidation or division of share capital, the restructuring may result in a change in the voting power of shareholders.
Where such a change in voting percentage occurs, the restructuring does not take effect automatically.
The company cannot implement the change merely through a board resolution or even a shareholders’ resolution.
In such situations, prior approval of the Tribunal is mandatory.
This approval must be obtained by making an application in the prescribed manner.
REDUCTION OF SHARE CAPITAL
Capital reduction is the process by which a company decreases its shareholders’ equity.
It is achieved through methods such as cancellation of shares or repurchase of shares.
Reduction of share capital refers to the reduction of issued, subscribed, and paid-up share capital of the company.
Capital reduction is undertaken when the existing capital structure no longer reflects the company’s financial reality.
It is often used in response to a permanent reduction in business operations.
It may also be adopted when the company suffers revenue losses that cannot be recovered from future earnings.
The objective is to align the company’s capital with its actual earning capacity.
Capital reduction helps in cleaning up the balance sheet and presenting a true and fair financial position of the company.
Since it affects shareholders’ rights, capital reduction is a regulated process requiring legal and statutory approvals.
NEED FOR REDUCTION OF SHARE CAPITAL
The need for reduction of share capital may arise in the following situations:
Returning surplus capital to shareholders
When the company has excess capital that is no longer required for its operations.
It Helps improve capital efficiency and shareholder returns.
Eliminating accumulated losses
The past losses may erode profits and restrict dividend payments.
Capital reduction helps write off losses and clean up the balance sheet.
Facilitating payment of dividends
Removal of losses enables the company to resume or declare dividends
As part of a scheme of compromise or arrangement
Capital reduction may be used during restructuring or settlement with creditors or shareholders.
It helps reorganize the company’s financial structure for long-term stability.
NECESSARY REQUIREMENTS TO REDUCE SHARE CAPITAL
In order to Reduce Share capital the following requirements are necessary:
Special Resolution
Reduction of share capital must be approved by a special resolution passed by the shareholders in a general meeting.
Authorisation in the Articles of Association
The company’s Articles of Association must authorize the reduction of share capital.
If not already authorized, the Articles must be altered first.
Confirmation of the Tribunal (NCLT)
The reduction of capital requires confirmation by the National Company Law Tribunal (NCLT).
The Tribunal makes sure that the interests of creditors and shareholders are protected.
MODES OF REDUCTION OF SHARE CAPITAL
A company limited by shares, or a company limited by guarantee having a share capital, may reduce its share capital.
Such reduction can be carried out only if authorised by its Articles of Association.
The company must pass a special resolution approving the reduction of share capital.
After passing the special resolution, the company must file a petition before the Tribunal
The reduction of share capital becomes effective only after confirmation by the Tribunal (NCLT).
The law permits the company to reduce its share capital in any manner, subject to compliance with statutory safeguards.
Modes of Reduction of Share Capital
(a). Extinguishment or Reduction of Liability on Unpaid Share Capital
The company may extinguish or reduce the liability on shares in respect of unpaid share capital.
This relieves shareholders from paying the unpaid or uncalled portion of their shares.
(b). Reduction of Share Capital With or Without Reduction of Shareholder Liability
The company may reduce its share capital with or without extinguishing or reducing liability on its shares.
This gives flexibility to restructure capital depending on the company’s financial needs.
(c). Cancellation of Paid-up Share Capital Lost or Unrepresented by Assets
The company may cancel paid-up share capital that is lost or not represented by available assets.
This is done when past losses have wiped out the real value of such capital.
(d). Payment of Excess Paid-up Share Capital to Shareholders
The company may pay off paid-up share capital that is in excess of the company’s requirements.
This involves returning surplus capital to shareholders.
In all the above cases, the company must alter its Memorandum of Association to reflect the reduced share capital and revised share structure.
REDUCTION OF SHARE CAPITAL WITHOUT APPROVAL FROM NCLT:
The following are cases which amount to reduction of share capital but where no confirmation by the Tribunal is necessary:
(a). Surrender of Shares
Surrender of shares is a voluntary act by a shareholder in which shares already issued are returned to the company.
The surrender can be made only by the registered holder of the shares.
Shares may be surrendered for various reasons, such as settlement of a dispute or any other agreed arrangement.
When shares are surrendered to the company, the transaction has the same legal effect as a transfer of shares in favour of the company.
Such surrender results in the company acquiring its own shares, which leads to a reduction of share capital.
Since reduction of share capital is involved, the surrender must comply with the provisions of company law governing capital reduction.
However, where under an arrangement the shares are transferred to a nominee of the company and not to the company itself, it does not amount to a reduction of share capital.
In such cases, the company does not directly acquire its own shares, and therefore the capital remains unchanged.
CONDITIONS UNDER WHICH THE SURRENDER IS VALID
A company may accept surrender of shares only in situations where forfeiture of shares would otherwise be legally justified.
Surrender operates as an alternative to forfeiture and cannot be used independently of such circumstances.
Once the surrender of shares is accepted by the company, the shareholder is fully discharged from any further liability in respect of those shares.
The Companies Act, 2013 does not expressly recognize or provide for surrender of shares.
As a result, surrender of shares is not an inherent statutory right of either the company or the shareholder.
Surrender is legally valid only when expressly permitted by the Articles of Association of the company.
In the absence of such authorization in the Articles, the surrender of shares would be invalid in law.
(i). Where forfeiture of such shares is justified
Surrender is allowed when the shareholder has failed to meet obligations, such as non-payment of calls.
In such cases, surrender acts as an alternative to forfeiture.
The company benefits by avoiding formal forfeiture proceedings.
(ii) When shares are surrendered in exchange for new shares of the same nominal value
Shareholders may surrender existing shares and receive new shares of equal nominal value.
This is often done as part of a capital reorganization or restructuring scheme.
Since the value of capital remains unchanged, the transaction is legally acceptable.
SURRENDER AND FORFEITURE
Both surrender and forfeiture result in termination of membership.
Forfeiture is initiated by the company due to default by the shareholder.
Surrender is initiated voluntarily by the shareholder, with the consent of the company.
FORFEITURE OF SHARES
Forfeiture of shares occurs when a company takes back shares from a shareholder due to default.
It generally arises from non-payment of calls or other amounts due on shares.
A company can forfeit shares only if its Articles of Association expressly authorize forfeiture
Forfeiture is an act initiated by the company, not by the shareholder.
Once shares are forfeited:
The shareholder loses membership.
All rights attached to the shares come to an end.
Forfeiture of shares does not require confirmation by the Tribunal (NCLT).
Although it results in reduction of capital in effect, it is treated as a statutory exception and not a formal reduction of capital.
DIMUNITION OF CAPITAL
Diminution of capital refers to the cancellation of shares that have not been taken or agreed to be taken by any person.
These shares are typically unissued or unsubscribed shares.
The cancellation leads to a reduction in the company’s share capital to that extent.
Such cancellation is permitted under the Companies Act and does not amount to a reduction of share capital requiring Tribunal approval.
It is a simple adjustment of capital structure, reflecting shares that were never actually issued.
Redemption of Redeemable Preference Shares
Redemption of preference shares involves the repayment of capital to preference shareholders.
Only redeemable preference shares can be redeemed.
Redemption must be carried out in accordance with the provisions of the Companies Act, 2013.
The shares may be redeemed: Out of profits, or Out of the proceeds of a fresh issue of shares.
Upon redemption, the preference shareholders cease to be members of the company.
Although redemption reduces share capital, it is a permitted and regulated form of capital reduction.
Buy-Back of Own Shares
Buy-back of shares refers to a company repurchasing its own shares from existing shareholders.
Buy-back can be made:
From existing shareholders.
From the open market.
It must be carried out within the limits and conditions prescribed under the Companies Act, 2013.
Buy-back results in a reduction of share capital to the extent of shares bought back and cancelled
It is used to:
Improve earnings per share.
Return surplus cash to shareholders.
Optimize capital structure.
Buy-back is a regulated process and must comply with statutory thresholds, disclosures, and approvals.
CREDITOR’s RIGHT TO OBJECT TO REDUCTION
After a company passes a special resolution for reduction of share capital, it must apply to the Tribunal (NCLT).
The application is made by way of a petition seeking confirmation of the resolution.
This requirement arises under Section 66 of the Companies Act, 2013.
Tribunal confirmation is mandatory to make sure that the interests of shareholders and creditors are protected.
CIRCUMSTANCES WARRANTING DETAILED SCRUTINY BY THE TRIBUNAL
(i) Diminution of liability on unpaid share capital
Where the reduction involves reducing or extinguishing the liability of shareholders on unpaid amounts.
This affects the company’s ability to call further capital from shareholders.
(ii) Payment of paid-up share capital to shareholders
Where the reduction involves returning capital already paid by shareholders.
This may impact the company’s financial position and creditor security.
(iii). Any other case as directed by the Tribunal
Even if the reduction does not fall under (i) or (ii), the Tribunal may still apply safeguards if it considers it necessary.
In the above cases, the law requires additional procedural safeguards, such as notices to creditors, representations, and confirmations.
TRIBUNAL CONFIRMATION OF REDUCTION OF SHARE CAPITAL
After passing a special resolution for reduction of share capital, the company must mandatorily apply to the Tribunal for confirmation.
The application is made by filing a petition under Section 66 of the Companies Act, 2013.
Tribunal approval is not automatic or procedural in nature.
The confirmation process acts as a substantive legal safeguard.
The Tribunal examines whether the proposed reduction is lawful and in compliance with statutory provisions.
It also assesses whether the reduction is fair and equitable.
Special attention is given to ensuring that the reduction does not prejudice the interests of shareholders, creditors, or other stakeholders.
Only after the Tribunal’s confirmation can the reduction of share capital take legal effect.
PROTECTIVE PROVISIONS IN CASES OF REDUCTION OF SHARE CAPITA
Special protective provisions become applicable where the proposed reduction of share capital involves:
(i). Diminution of liability in respect of unpaid share capital.
(ii). Payment to any shareholder of any paid-up share capital.
(iii). Any other case as directed by the Tribunal
In such cases, creditors whose debts or claims would be admissible in a winding-up are granted a statutory right to object to the proposed reduction.
For this purpose, the Tribunal prepares and settles a list of creditors who are entitled to raise objections.
The Tribunal makes sure that all eligible creditors are identified and notified of the proposed reduction.
If any creditor raises an objection, the reduction of share capital cannot be confirmed unless:
The creditor has consented to the reduction.
The creditor’s debt has been paid in full.
The creditor’s claim has been adequately secured.
ROLE OF THE TRIBUNAL AND STATUTORY NOTICE REQUIREMENTS IN CAPITAL REDUCTION
While deciding whether to confirm a reduction of share capital, the Tribunal must consider the interests of creditors as well as minority shareholders.
The Tribunal ensures that the proposed reduction:
Does not operate in an unfair, discriminatory, or oppressive manner, particularly against minority shareholders.
In this regard, the Tribunal’s function is supervisory and protective, rather than merely procedural.
The Tribunal is statutorily required to issue notice of every application for reduction of share capital to:
The Central Government.
The Registrar of Companies.
The Securities and Exchange Board of India (SEBI) in the case of listed companies.
The creditors of the company.
The Tribunal must consider any representations or objections received from these authorities or creditors.
Such representations or objections must be made within three months from the date of receipt of the notice.
If no representation or objection is received within the prescribed period, then:
The law presumes that there is no objection to the proposed reduction from the concerned authority or creditor.
SCOPE AND CONDITIONS OF THE TRIBUNAL’S POWER TO CONFIRM REDUCTION OF SHARE CAPITAL
The Tribunal’s power to confirm a reduction of share capital is wide and discretionary, and is not confined by rigid or mechanical rules.
However, this power is conditional upon the Tribunal being satisfied that all creditors entitled to object have:
Consented to the reduction.
Been paid in full.
Had their claims adequately secured.
This principle was authoritatively laid down in the case of British and American Trustee and Finance Corporation v. Couper (1894), where it was held that:
The court’s discretion must be exercised primarily to protect the interests of creditors.
In exercising its discretion, the Tribunal must examine whether the proposed reduction is fair, equitable, and reasonable.
Specifically, the Tribunal must be satisfied that:
(i). The interests of creditors are fully and adequately safeguarded.
(ii). The interests of shareholders, particularly minority shareholders, are properly considered and protected.
(iii). The public interest is not adversely affected by the proposed reduction.
Only when all these conditions are fulfilled will the Tribunal sanction and confirm the reduction of share capital.
CONFIRMATION AND REGISTRATION
Section 66(3) of the Companies Act, 2013:
The provision applies after a company applies to the Tribunal for reduction of share capital.
The Tribunal must be satisfied regarding the protection of creditors before approving the reduction.
Creditors who are entitled to object are those whose debts may be affected by the proposed reduction.
The Tribunal can confirm the reduction if any one of the following conditions is met:
(a). The concerned creditors have given their consent to the reduction.
(b). The creditors’ debts have been determined (quantified).
(c). The debts have been discharged.
(d). The debts have been paid.
(e). The debts have been secured to the satisfaction of the Tribunal.
If the Tribunal is satisfied on the above grounds, it may confirm the reduction.
While confirming, the Tribunal may impose such terms and conditions as it thinks fit, depending on the facts of the case.
The proviso places a mandatory condition on sanctioning any reduction of share capital.
The Tribunal cannot sanction the reduction unless the accounting treatment proposed by the company:
Conforms to the Accounting Standards prescribed under Section 133.
Conforms to any other relevant provision of the Companies Act, 2013.
The company must file a certificate from its auditor confirming that:
The proposed accounting treatment complies with the applicable accounting standards.
This auditor’s certificate must be filed with the Tribunal.
Without such conformity and certification, the Tribunal has no power to sanction the reduction of share capital.
PUBLICATION OF TRIBUNAL ORDER
Section 66(4) of the Companies Act deals with publication of Tribunal Order.
Once the Tribunal confirms the reduction of share capital under Section 66(3), it passes an order of confirmation.
The company is mandatorily required to publish this order.
The manner, form, and medium of publication are not fixed by the Act.
The publication must be done strictly as directed by the Tribunal (for example, newspapers, website, or any other mode).
The objective of publication is to inform stakeholders and the public about the approved reduction of share capital.
FILING , REGISTRATION AND EFFECT OF REDUCTION
Section 66(5) of the Companies Act deals with Filing, Registration, and Effect of Reduction.
After receiving the Tribunal’s confirmation order, the company must deliver documents to the Registrar of Companies (ROC).
The documents to be delivered are:
(a). A certified copy of the Tribunal’s order confirming the reduction.
(b). Minutes approved by the Tribunal containing prescribed capital details.
These documents must be filed within 30 days from the date of receipt of the Tribunal’s order.
The Registrar, on receipt, will register both the order and the minutes.
The reduction of share capital takes effect only upon registration, and not from the date of the Tribunal’s order.
After registration, the Registrar issues a certificate of registration.
This certificate is conclusive evidence that:
All legal requirements under the Act have been complied with.
The company’s share capital stands reduced exactly as stated in the registered minutes.
Following registration, the company must alter its Memorandum of Association to reflect the revised share capital.
THE DETAILS OF THE MINUTES
The minutes filed with the Registrar must clearly specify the following:
(a). Amount of Share Capital
This refers to the total share capital of the company after reduction.
It represents the revised capital figure, not the original capital.
Example: If ₹10 crore is reduced to ₹7 crore, the amount of share capital will be ₹7 crore.
(b). Number of Shares into Which It Is to Be Divided
This states the total number of shares comprising the reduced share capital.
It reflects any cancellation, consolidation, or extinguishment of shares.
Example: Reduction from 1 crore shares to 70 lakh shares.
(c). Amount of Each Share
This means the face value (nominal value) of each share after reduction.
The reduction may involve:
Decreasing the face value (e.g., ₹10 to ₹5).
Keeping the face value same but reducing the number of shares.
This must be clearly mentioned to avoid ambiguity for shareholders and regulators.
(d). Amount, If Any, Deemed to Be Paid-Up on Each Share
This specifies how much of the face value of each share is considered paid-up as on the date of registration.
It is relevant where:
Shares are partly paid-up.
Reduction involves writing off unpaid capital.
Example:
Face value: ₹10
Amount deemed paid-up: ₹7
Unpaid amount written off during reduction.
Key Legal Effect
Until the order and minutes are registered, the reduction has no legal effect.
Once registered:
The reduction becomes final and binding.
The Registrar’s certificate cannot be questioned.
The company’s capital structure stands legally altered.
CONCLUSIVENESS OF CERTIFICATE FOR REDUCTION OF SHARE CAPITAL
Once the Registrar of Companies issues a certificate confirming the reduction of share capital, that certificate is treated as conclusive evidence.
Conclusive means that the validity of the reduction cannot be challenged later, even if defects are discovered subsequently.
Re Walkar & Smith Ltd. (1903)
In this case, the Registrar had already issued a certificate confirming the reduction of share capital.
Later, it was discovered that the company did not have authority under its Articles of Association to reduce its share capital.
Despite this defect, the court held that the reduction could not be questioned or invalidated.
The Registrar’s certificate was held to be final and binding, overriding the internal irregularity in the Articles.
Ladies’ Dress Association v. Pulbrook (1900)
In this case, the special resolution that was passed for reduction of capital was itself invalid.
However, the company had completed the reduction process and obtained the Registrar’s confirmation.
The court held that the reduction could not be undone, even though the resolution was defective.
The completed reduction stood valid due to the finality attached to the Registrar’s certificate.
Once the Registrar registers the reduction and issues the certificate , it cannot be challenged on grounds that:
It has Procedural defects.
It Lack of Authority in Articles.
It Defects in the special resolution
The law prioritises certainty and finality over reopening completed corporate actions.
This principle protects:
Shareholders.
Creditors.
Third parties.
who rely on the registered capital structure of a company.
LIABILITY OF MEMBERS WITH RESPECT TO REDUCED SHARE CAPITAL
When a company reduces its share capital, the liability of its members is correspondingly reduced.
A member (past or present) of the company cannot be made liable for any call or contribution beyond a specified limit.
The maximum liability of the member is restricted to the difference between:
The amount already paid on the share (or the reduced amount deemed to be paid, if any) and
The amount of the share as fixed by the Tribunal’s order of reduction.
If there is no difference between these two amounts, the member has no further liability at all.
This protection applies even after the member has ceased to be a shareholder, provided the liability relates to shares held earlier.
The objective is to make sure that shareholders are not retrospectively burdened after the capital structure has been legally altered.
EFFECT OF REDUCTION ON CALLS AND CONTRIBUTIONS
After reduction:
No fresh calls can be made on the extinguished or reduced portion of capital.
Members are liable only up to the revised capital figure.
The reduced capital, as approved by the Tribunal, becomes the final measure of shareholder liability.
Reckitt Benckiser (India) Ltd. Case (2005)
In this case, the company proposed a reduction of share capital.
A group of shareholders objected to the reduction.
The objections were based on two grounds:
(a) There was no genuine necessity to reduce the share capital.
(b) The reduction was discriminatory, as it would extinguish the entire class of public shareholders.
The objecting shareholders argued that the reduction unfairly targeted one class while benefiting others.
To resolve the dispute, the company offered the objectors an option to continue as shareholders instead of being eliminated.
This offer removed the allegation of unfair discrimination.
On this basis, the Delhi High Court approved the reduction of share capital.
KEY PRINCIPLES OF REDUCING SHARE CAPITAL
Reduction of share capital must be:
Fair.
Non-discriminatory.
Justified by commercial reasons.
Courts will not approve a reduction that arbitrarily eliminates a class of shareholders.
However, if objections are adequately addressed and fairness is restored, the court may still sanction the reduction.
PROTECTION OF OMITTED CREDITORS AFTER REDUCTION OF SHARE CAPITAL
Circumstances
After a reduction of share capital has been completed and registered and it has been come to the notice that:
With respect to a creditor who was entitled to object to the reduction under Section 66.
The creditor’s name was not included in the list of creditors prepared for the reduction proceedings.
The omission occurred because the creditor was ignorant of:
The reduction proceedings.
The nature and effect of the reduction on his debt or claim.
After the reduction, the company commits a default as defined under Section 6 of the Insolvency and Bankruptcy Code, 2016.
This default occurred in respect of that creditor’s debt or claim.
Section 6 of the Insolvency & Bankruptcy code states that:
When a corporate debtor commits a default.
Upon such default, the right to initiate the Corporate Insolvency Resolution Process (CIRP) arises.
The following persons are entitled to initiate CIRP:
A Financial Creditor.
An Operational Creditor.
The Corporate Debtor itself.
The initiation of CIRP must be done in respect of the corporate debtor that has committed the default.
The process must be initiated in the manner prescribed under the relevant Chapter of the Insolvency and Bankruptcy Code, 2016, including compliance with procedural requirements.
Thus, the Code adopts a trigger-based mechanism, where the occurrence of default enables insolvency proceedings, regardless of the nature of the creditor.
The term default is defined in Section 3 (12) of the Insolvency and Bankruptcy Code:
Default refers to non-payment of a debt.
The non-payment may relate to:
The whole amount of the debt.
Any part of the debt.
Any instalment of the debt.
The debt must have become due and payable.
Despite becoming due and payable, the amount is not paid.
The non-payment may be by:
The debtor.
The corporate debtor, as the case may be.
Thus, even partial non-payment or default in a single instalment constitutes a default under the Code.
Consequence of Such Omission
In such a situation, the law re-opens limited liability to protect the omitted creditor.
The liability does not revive automatically in full, but only to the specified extent:
Clause (a): Liability of Members
Every person who was a member of the company on the date of registration of the order of reduction by the Registrar becomes liable.
This liability is collective , so all such members may be called upon to contribute.
The contribution is limited to the maximum amount the member would have been liable to pay if:
The company had gone into winding-up on the day immediately before the registration of the reduction.
The objective is:
Shareholders do not escape liability due to procedural omission.
Shareholders are not exposed to greater liability than what would have existed in a winding-up.
Thus, liability is capped and controlled, not unlimited.
Clause (b): Powers of the Tribunal in Winding-Up
It applies if the company is wound up.
The omitted creditor may apply to the Tribunal.
The creditor must prove his ignorance of the reduction proceedings and their effect on his debt.
If satisfied, the Tribunal may settle a list of persons liable to contribute.
These persons are the members referred to in clause (a).
The Tribunal may then:
Make calls on such contributories.
Enforce orders for payment.
The contributories are treated as if they were ordinary contributories in a winding-up.
This means the usual rules of contributory liability in winding-up apply to them.
PENALTIES
Penalty for Fraud in Reduction of Share Capital
The penalty applies any officer of the company involved in the process of reduction of share capital.
The term officer includes directors, key managerial personnel, or any person who is responsible for or participates in the reduction process.
Acts That Attract Liability
(a). Knowingly conceals the name of a creditor
The officer intentionally hides or omits the name of a creditor who is legally entitled to object to the reduction.
The concealment must be deliberate, not accidental or due to oversight.
The objective of such concealment is usually to prevent the creditor from objecting before the Tribunal.
(b). Knowingly misrepresents the nature or amount of debt
The officer intentionally gives false or misleading information regarding:
The nature of the creditor’s claim (for example, showing a secured debt as unsecured).
The amount of the debt or claim.
Such misrepresentation affects the Tribunal’s assessment of whether creditors are adequately protected.
(c). Abets or is privy to concealment or misrepresentation
Even if the officer does not directly commit the act, he is liable if he:
Assists, Encourages, or Knowingly allows such concealment or misrepresentation.
Passive involvement with knowledge and consent is sufficient to attract liability.
LIABILITY UNDER SECTION 447 OF THE COMPANIES ACT , 2013
Any officer guilty of the above acts is deemed to have committed fraud.
Section 447 deals with punishment for fraud under the Companies Act, 2013.
The punishment may include: Imprisonment, fine, or both, depending on the gravity of the offence.
If the fraud involves public interest, minimum imprisonment prescribed under Section 447 becomes applicable.
REDUCTION OF SHARE CAPITAL AND SCHEME OF COMPROMISE AND ARRANGEMENT
An arrangement under company law includes a reorganisation of the share capital of a company.
Such reorganisation may involve reduction of share capital.
Therefore, reduction of share capital can legally be carried out as part of a scheme of compromise or arrangement.
NON-APPLICABILITY OF SEPARATE REDUCTION FORMALITIES
Where reduction of share capital is embedded in a scheme of compromise or arrangement:
The company is not required to separately comply with the procedural formalities prescribed for a standalone reduction of capital.
In such cases, the reduction forms an integral part of the scheme itself, and is considered along with the overall restructuring proposal.
This legal position has been judicially recognised in several decisions, including:
Maneckchowk and Ahmedabad Mfg. Co. Ltd., Re (1970)
Vasant Investment Corporation Ltd. v. Official Liquidator (1981)
Mcleod & Co. Ltd. v. S.K. Ganguly (1975)
The underlying rationale is that the scheme approval mechanism itself provides adequate safeguards.
These safeguards include:
Scrutiny by the Court/Tribunal.
Approval by shareholders and creditors.
Consideration of fairness and stakeholder interests.
Since these protections are already built into the scheme process, a separate capital reduction procedure is unnecessary.
Mandatory Disclosure in the Scheme Petition
Even though separate reduction formalities are not required, specific disclosure is mandatory.
The petition filed before the Tribunal must expressly state that:
The company is seeking confirmation of the scheme &
Simultaneously seeking confirmation of reduction of share capital as part of that scheme.
The reduction cannot be implied or assumed; it must be clearly and explicitly mentioned.
Consent of Members
While seeking approval of members for the scheme, the company must ensure that:
Members have also consented to the reduction of share capital.
Such consent is part of the same approval process.
Without member consent to the reduction aspect, the scheme cannot be validly sanctioned insofar as it involves reduction.
Opportunity to Creditors: Discretion of the Tribunal
The Tribunal has the power to allow creditors to raise objections to the reduction of share capital.
This power is discretionary, not mandatory.
In appropriate cases, the Tribunal may decide not to invite objections from creditors.
Such discretion is usually exercised where:
Creditors’ interests are fully protected.
The reduction does not adversely affect their rights or claims.
