Methods and Legal Procedure for Capital Reduction under Section 66

Understand Methods and Legal Procedure for Capital Reduction

Key rules to remember

Authority for reduction

Articles authorise + Special resolution + Tribunal confirmation = valid reduction under Section 66

All three conditions are needed for a reduction under Section 66. Forfeiture or surrender of shares, buyback (Section 68) and redemption of redeemable preference shares (Section 55) are not Section 66 reductions.

Reduction in face value per share (partly paid versus fully paid)

Reduction = (Old face value − New face value) per share × Number of shares

On partly paid shares, a cut in face value first reduces the uncalled liability, up to the uncalled amount. Any part beyond the uncalled amount reduces paid-up capital. Reducing the liability on uncalled shares is a Section 66 reduction, just like cancelling paid-up capital. It leaves paid-up capital unchanged, so no accounting entry is needed for paid-up capital, but the share capital disclosure (face value and uncalled amount) changes. On fully paid shares there is no uncalled amount, so the whole reduction cuts paid-up capital and is written off or returned. Example: shares reduced from ₹10 to ₹7 give a reduction of ₹3 per share. If the shares are ₹6 paid up (₹4 uncalled), the uncalled liability falls from ₹4 to ₹1 and paid-up capital stays at ₹6. If the shares are fully paid, paid-up capital falls from ₹10 to ₹7.

Capital reduced to write off loss

Capital Reduction Account: Credit = Total sacrifice; Debit = Losses and overvalued assets written off + Cost of reconstruction; Balance, if any, → Capital Reserve

The Capital Reduction Account is credited with the total sacrifice and debited with the write-offs. The write-offs are set to match the sacrifice available. The balance left in the account after the write-offs, if any, is transferred to Capital Reserve.

Reduction versus alteration

Reduction (Section 66): paid-up capital or liability on shares falls; needs articles, special resolution and Tribunal. Alteration (Section 61): structure changes, no reduction of paid-up capital; needs articles and ordinary resolution, no Tribunal

Use this one-line contrast whenever the question asks you to distinguish them. Cancelling unissued shares cuts only authorised capital and is an alteration.

How to solve Methods and Legal Procedure for Capital Reduction questions

1. 1Read the question and identify what is asked: legal procedure, method, or the accounting entries.
2. 2For a theory answer, state the Section 66 conditions first: articles authority, special resolution, Tribunal confirmation.
3. 3Name the method used: reduce liability on unpaid shares, cancel lost capital, or return excess capital.
4. 4For a numerical, find the total amount of reduction from the new and old face values and the number of shares. Then check whether the shares are fully paid or partly paid. On partly paid shares, the reduction first cuts the uncalled liability. That is still a Section 66 reduction, but it does not change paid-up capital, so it needs no accounting entry for paid-up capital, although the share capital disclosure changes. Only the part that cuts paid-up capital is entered. On fully paid shares the whole reduction cuts paid-up capital.
5. 5List every item to be written off: accumulated loss, fictitious assets, overvalued assets, and reconstruction expenses.
6. 6Pass the entries: debit the old share capital for its full amount, credit the new share capital for the reduced amount, and credit Capital Reduction Account for the reduction. Then debit that account for each write-off.
7. 7Transfer any remaining balance in the Capital Reduction Account to Capital Reserve.
8. 8Check the Capital Reduction Account: the write-offs are set to match the sacrifice available, and any balance left goes to Capital Reserve. Then conclude.

Quickest way: Quick route for MCQs and written answers

Common mistakes in Methods and Legal Procedure for Capital Reduction

• Treating sub-division or consolidation of shares as capital reduction.

  Both change the face value of shares, so they look alike.

  Fix: Ask whether paid-up capital or the liability on shares falls. Sub-division and consolidation leave total capital unchanged, so they are alteration under Section 61. That needs authority in the articles and an ordinary resolution in general meeting, with no Tribunal approval.

• Forgetting Tribunal confirmation and writing only 'special resolution'.

  Students remember the resolution but not the creditor protection step.

  Fix: Always write all three conditions: articles, special resolution, Tribunal.

• Crediting the whole reduction to Capital Reserve at once.

  It seems simpler than using a Capital Reduction Account.

  Fix: Credit the Capital Reduction Account first. Debit write-offs against it. Only the balance goes to Capital Reserve.

• Leaving out the reconstruction expenses from the write-offs.

  They are mentioned in a side note of the question.

  Fix: Underline every cost, loss and asset adjustment in the question before you start entries.

• Calculating reduction on the wrong number of shares.

  Students use the old share count after a change in face value.

  Fix: Compute the reduction per share first, then multiply by the original number of shares.

Worked examples