Capital Reduction 4g3652

Capital Reduction Reduction of Share Capital Sometimes there may be a genuine necessity for the reduction of capital. This power is, given by Section 100 of the Companies Act, subject to the compliance of conditions. According to this, a company may, (1) extinguish or reduce the liability on any of its shares in respect of share capital not paid up (2) cancel any paid-up share capital which is lost or is unrepresented by any available assets; (3) pay off any paid-up share capital which is in excess of what is required by the company. Conditions for effecting a reduction Following conditions are required to be fulfilled by a company to reduce its share capital – (a) The Articles of Association of the company must permit it to reduce its capital; (b) The company in general meeting shall a special resolution to reduce its capital; and (c) The approval of National Company Law Tribunal (previously Court) shall be obtained for the scheme of reduction in share capital. Methods of Reduction in Share Capital: There are three ways to give effect to the scheme of Reduction in Share Capital. These are as follows: (1) By extinguishing or reducing the liability on any of its shares. (2) By paying off any paid-up share capital which is in excess of what is required by the company. (3) By cancelling any paid- up capital which is lost or is unrepresented by any available assets.

CHECK YOUR PROGRESS

A. Mention the options available to a company for the reduction of capital.

ing Entries on Reduction in Share Capital in the books of company ing of reduction in Share Capital by company in case of the above three methods is shown below: (1) Journal entry for reduction of liability in respect of the uncalled amount on Shares:

EXAMPLE 5 Glow Sign Ltd. has an issued capital of 4,000 equity shares of Rs. 100 each, Rs. 80 called and paid up. Necessary formalities being complied with, the company decided on 1.4.2009 to reduce the share of Rs. 100 to the share of Rs. 80 as fully paid up by cancelling unpaid amount of Rs.20 per share. necessary journal entry and show the share capital as it will appear in the balance sheet of the company after cancellation. Solution: In the Books of Glow Sign Ltd. Journal Entries

(2) Journal entry for reduction by refund of excess capital to shareholders : There may be two situations: (i) When denomination of shares is changed i.e. reduction by way of refund with change in the face value, and (ii) When denomination of shares is not changed i.e. reduction by way of refund without change in the face value.

(i) When denomination of shares is changed i.e. reduction by way of refund with change in the face value (a) To record the change:

(b) To record Payment to Shareholders

(c) To transfer to General Reserve :

(ii) When denomination of Shares is not changed i.e. Reduction by way of refund without change in the face value: (a) To record the transfer of the returnable amount:

(b) To record Payment to Shareholders

(c) To transfer to General Reserve:

EXAMPLE 6 Sontoshi Ltd. has a capital of Rs. 2,00,000 divided into 20,000 equity shares of Rs. 10 each fully paid up. The company decided on 1.4.2009 to convert the shares into Rs. 8 per share paid up and return Rs. 2 per share to equity shareholders. necessary journal entries in the books of the company assuming all legal formalities have been observed. Solution : In the Books of Santoshi Ltd. Journal Entries

EXAMPLE 7 Honda Ltd has a capital of Rs. 2,00,000 divided into 20,000 equity shares of Rs. 10 each fully paid up. The company decided on 1.4.2009 to return Rs. 2 per share to equity shareholders and make the shares Rs. 8 called and paid up. necessary journal entries in the books of the company assuming all legal formalities that have been observed. Solution : In the given problem, shares of Rs. 10 are not converted into shares of Rs. 8. Rs. 10 fully paid up shares are made Rs. 8 called up and paid up, the shares remain at the nominal value of Rs. 10 each.

(3) Journal entries for Cancellation of any paid up capital which is lost or is unrepresented by any available assets i.e. Reduction in Capital: In case of heavy losses incurred over the years, the capital base and the financial strength of company may become weak. In such cases it becomes necessary for such a company to undertake some financial reconstruction measures. Such financial reconstruction measures are given effect through schemes of capital reduction.

Generally, shareholders have to bear the loss. If the loss is heavy, then creditors and debentures holders are also required to bear a portion of such financial loss. This is the third way through which internal reconstruction of a company can be carried out, the ing entries of which are shown below. For this a ‘Capital Reduction ’, which is also called ‘‘Reconstruction’’ or ‘‘Re-organisation’’ , is opened. In examination problems where there are no specific directions, you may use any of the viz. ‘Capital Reduction ’ or ‘Reorganisation ’ or ‘Reconstruction ’. Journal Entries for giving effect to the Capital Reduction Scheme: (i) When denomination of Shares is not reduced; only paid up value is reduced–

(iv) For Sacrifice made by Debentureholders, if any;

(v) For Sacrifice made by Creditors, if any:

(vi) For recording any increase in the value of Assets (on Revaluation):

(vii) For recording decrease in the value of liability:

(viii) For making any Provision for Contingent Liability:

(ix) Capital Reduction is used for writing off various accumulated losses, afictitious assets and loss on assets and liabilities and the journal entry is–

LET US KNOW The amount to be written off cannot exceed the amount credited to Capital Reduction . But if there is any reserve in the liabilities side of the balance sheet, the same may be utilised in writing off accumulated losses and fictitious assets. After writing off various assets, if any balance is left in the Capital Reduction , the same will be

transferred to Capital Reserve . 1. The words ‘‘And Reduced’’ should be added to the name of the company, if the National Company Law Tribunal (NCLT) so directs. 2. The amount written off in respect of fixed assets under a scheme of reconstruction must be shown in the Balance Sheet for five years after the date of reduction. 3. After completion of the ing process the Capital Reduction should not show any balance. EXAMPLE 8 Balance Sheet of Barpeta Ltd. as on 31st March, 2009

Following scheme of reconstruction has been ed and approved by the court on 1.4.2009: (i) The equity shares are to be reduced to shares of Rs. 6 each fully paid 8% Preference shares are to be reduced to 10% Preference shares of Rs. 80 each fully paid. Number of shares to remain the same. (ii) 9% debentures are to be reduced to 10% debentures of Rs. 80 each fully paid. (iii) The amount so available will used to write off loss and goodwill first, and there after fixed assets to the extent possible. You are required to give journal entries and Balance Sheet in the books of Barpeta Ltd. Solution: