Reduction of Share Capital as per Section 100 to 105 of the Companies Act, 1956* :

Capital Reduction refers to the cancellation of that part of paid up capital which is lost in operations or which is not represented by existing assets. It is generally resorted to write off the past accumulated loss of the company. It is unlawful except when sanctioned by the court because conservation of capital is one of the main principles of the company law.

A company limited by shares or a company limited by guarantee and having a share capital if so authorised by its articles, by special resolution, can reduce its share capital in any way subject to confirmation by the Court-

(i) By reducing the uncalled liability of the members.

(ii) By writing off the part of paid up capital which is lost in the operations or which is not represented by available assets.

(iii) By returning the part of capital which is in the excess of the need of the company.

A company may reduce its share capital if all of the following conditions are satisfied:

(i) If a company is authorised by its articles to do so.

(ii) If special resolution is passed at a general meeting.

(iii) If the court’s order in confirming the reduction of share capital is obtained.

Procedure for reducing share capital

(i) The company cannot reduce its share capital unless it is authorised by its articles. However, if the articles do not permit capital reduction, they may be altered by special resolution to enable the company to reduce its share capital.

(ii) The company must pass a special resolution for reduction of capital.

(iii) The company must apply to the court for an order confirming the capital reduction. The court must look after the interests of creditors and shareholders’ before giving an order confirming the capital reduction.

(iv) The court may make an order confirming the capital reduction. The court may make an order confirming the capital reduction on such terms and conditions as it thinks proper, if it is satisfied that every creditor of the company entitled to object capital reduction has consented to the reduction or that his debt has been discharged or secured by the company.

(v) The court may also order the company to add the words “and reduced” to the name of the company for such period as it deems fit. The court may also order the company to publish reasons for reduction and all other information in regard thereto for public information.

(vi) The order of the court confirming the reduction must be produced before the registrar and a certified copy of the order and of the minutes of reduction should be filed with the registrar for registration.

Note: In the following cases, procedure of reduction of capital is not called for:

(i) Where redeemable preference shares are redeemed in accordance with the provisions of section 80.

(ii) Where any shares are forfeited for non-payment of calls.

(iii) Where there is surrender of shares or a gift is made to a company of its own shares.

(iv) Where the nominal share capital of a company is reduced by cancelling any shares which have not been taken or agreed to be taken by any person.

Accounting procedure

(i) In case of internal reconstruction by reducing capital, a “capital reduction account” is to be opened, which is credited with the amount sacrificed by the shareholders, debenture holders and creditors.

(ii) Then the amount of capital reduction is utilised for writing off fictitious assets, past losses and excess value of other assets.

(iii) If there is any balance of capital reduction account left after writing off the above losses, then it is to be transferred to capital reserve account.

(iv) The amount to be written off cannot exceed the amount credited to the capital reduction amount. But if any reserve appears on the liabilities side of the balance sheet, the same may be utilised in writing off the accumulated losses and assets.

(v) Write off all fictitious assets (including Goodwill and Patents) and eliminate all overvaluation of assets by crediting the accounts concerned and debiting the Capital Reduction (or Reconstruction) Account. For this purpose, any reserve appearing in the books of the company may be used. If any balance is left in the Capital Reduction (or Reconstruction) Account it should be transferred to the Capital Reserve Account.

(vi) If there is any contingent liability (like arrears of preference dividend etc.) and if the same is forgone for the claimant, then no entry will be passed.

(vii) If any contingent liability or unrecorded liability (like reconstruction expenses) is to be paid, then it will be
paid out of capital reduction a/c.

(viii) In case there are any profits or gain occurs during the process of internal reconstruction then such profits or gains must be credited to capital reduction account.

(ix) In case of surrender of shares, shareholders surrender part of their holdings to the company, which are utilised to repay debenture holders, preference shareholders and other creditors of the company. Balance of unused shares surrendered is to be cancelled by transferring to capital reduction account.

Accounting Entries

1	Entry for share capital reduced without changing the face value of the shares
	Share Capital A/c                                                            Dr.
	To Capital Reduction/Reconstruction/                                                                               (with the amount of the reduction made)
	Reorganization Account) A/c
2	Entry if face value of the shares is also changed on reduction of capital a new category of share capital is created
	Share Capital A/c (Old)                                                Dr.
	To Share capital A/c (New)                                                                            (with the amount treated as paid up)(with the
	To Capital reduction A/c difference amount)
3	Entry When debenture holder and creditors are also ready to reduce their claim against company
	Debenture A/c                                                                Dr.
	Creditors A/c                                                                  Dr.
	To Capital reduction A/c
4	Entry in case of appreciation in the value of any asset
	Assets A/c                                                                        Dr.
	To Capital reduction A/c
5	Entry if any contingent liability matures and is to be paid immediately the following entry is passed
	Capital reduction A/c                                                Dr.
	To Liability payable A/c
	Liability Payable A/c                                                 Dr.
	To cash/ Bank/ share capital A/c
6	Entry for utilising the amount of capital reduction to write off accumulated losses.
	Capital Reduction A/c                                               Dr.
	To Profit & Loss A/c
	To Preliminary Expenses A/c
	To Discount on Shares /Debentures A/c
	To Goodwill A/c
	To Trade Assets A/c
	To Patents/Copy rights
	To Assets A/c
7	For transferring any balance left in the capital reduction account to capital reserve account
	Capital reduction A/c                                                     Dr.
	To capital reserve A/c (with the balance left)

 

While preparing the balance sheet of a reconstructed company, the following points are to be kept in mind:

(i) After the name of the company, the words “and Reduced” should be added only if the Court so orders.

(ii) In case of fixed assets, the amount written off under the scheme of reconstruction must be shown for five years.