Reduction of Share Capital

Generally a company is prohibited from
reducing its share capital.
 Effect: reduce the assets that are available
for the creditors if companies goes into

Exception – Sec 64

A company may reduce its shares by:
Extinguish or reduce the liability on
any of its shares in respect of share
capital not paid up
b) Cancel any paid up capital which is lost
or unpresented by available assets;
c) Pay off any paid up share capital which is
in excess of the needs of the company.

Extinguish or reduce the liability on any of its shares in respect of share capital not paid up Where company issued partly paid shares. later the company no longer needed the uncalled amount.  May carry out a reduction of capital by cancelling the amount that is no longer required.  .

 .  Co may wish to cancel some of its capital so that the balance sheet would gives more accurate view of the company’s financial position.Cancel any paid up capital which is lost or unpresented by available assets A company may lose money during its trading & the amount shown as paid up capital in a co’s financial statement may no longer reflect the value of assets.

 .Pay off any paid up share capital which is in excess of the needs of the company Re Fowlers Vacola Manufacturing Co Ltd Co sold a substantial part of its business operations which resulted in excess capital to members.

ii.Procedure for reduction – sec 64 (1) i. iii. Authorization from the articles Table Article 42 A special resolution in general meeting and Confirmation by the court (High court + by way of petition) .

 Sec 64 (2) (c) (i) & (ii) – payment of creditors’ debt .Creditors’ rights – sec 64 (2)  Sec 64 (2) (a) – creditors entitled to object.

Court may order reduction if:  The consent of the creditors who are entitled to object has been obtained or  Their debts and claims have been discharged determined or secured sec 64 (4) .

Ltd (1983) A company limited by shares cannot return the capital to the shareholders. . (2)the appellant company had no power to rescind the contract for shares and to return the application moneys as moneys borrowed or as moneys had and received because an illegal reduction of capital would thereby be involved. (1)the appellant company could not convert or agree to convert their equity capital into a loan. conditionally or unconditionally and repay the loan without reduction in capital which no company could effect without the leave of the court.Case  Merchant Credit Pte Ltd v Industrial & Commercial Realty Co.

Other reduction permitted Sec 62 (1) (e). (2) – cancellation of shares not a reduction  Sec 61 – redemption of redeemable preference shares  Sec 60 (3) (e) & (f) – application of share premium account  Sec 181 (2) (c) – court order  .

 If what is proposed (reduction) is in accordance with the class rights upon winding up. there is no variation.Is reduction – variation?  Paying off preference shareholders depends on whether the class rights would have been affected upon winding up. .

HOL: The preference shareholders had a right to a return of capital in priority to other shareholders and that right was not affected.House of Fraser plc v ACGE Investment Ltd F: General meeting passed a special resolution . no class meeting & court could not confirm. Preference shareholders. .paying off the preference share capital.

COA: It was a reduction. Co proposed paying off its preference shares and cancelling them. there should be separate class meeting. .Re Northern Engineering Industries plc F: AOA.rights of any class were to be deemed to be varied by the reduction of the capital paid up on those shares.

.Dividends  A company cannot use the funds or money which it has raised from the shareholders to pay dividends ◦ Illegal return of capital to the shareholders ◦ Fraud on the creditors – as the company would be less able to pay its debts.

 Art 100 of Table A.  .Sec 365 (1) No dividend shall be payable to the shareholders of any company except out of profits or pursuant to section 60 (sec 60 (3) (c).

decision is a matter of internal management  .Rights of a shareholders to dividends Conditional right .depends on the existence of profits .

If declared – debts owed by the company to the shareholders.  Cannot be revoked. cancelled or reduced  .

Hilton International .Not justify to declare D when the co is insolvent  . insolvent or jeorpadize co’s balance sheet  Chip Thye Enterprise Pty Ltd . if co.D should be paid out of profits .No D.

Method of payment of dividends By cash  By issue of fully paid up shares (bonus shares) – sec 60 (premium account)  Sec 67A (3B): treasury shares (share dividend)  .

 Payment  .2 steps involved Declaration of the dividend by competent authority.

Who may declare dividends Company in general meeting.  .It is possible for the articles to vest the power to declare dividends in the directors. subject to the amount recommended by the directors (Art 98)  Industrial Equity Ltd v Blackburn .

Profits for payment of dividends need to be available at the time the dividends are declared and not necessary available when the dividend is actually paid .Available of profits  Marra Development Ltd .

Industrial Equity Ltd v Blackburn “Profits belonging to a subsidiary could not be applied for the payment of its holding” .

Effect of Contravention Sec 365 (2) (a) Every director or manager who permitted the payment of such dividend would be guilty.  .  Sec 365 (2) (b) Directors maybe personally liable to compensate the creditors.

 .Interim Dividends Article 99  Its declaration does not create a debt  May revoke before payment.