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CA Intermediate · Corporate and Other Laws · Share Capital and Debentures

Mehta Pharma Ltd has issued 1,00,000 equity shares of Rs 10 each, and its articles permit a reduction of capital. On 1 April it passed a special resolution to reduce share capital by cancelling Rs 2 per share paid up, to return the money to shareholders. Creditor Gupta objects. Which statement is correct?

The reduction is not effective on the special resolution alone. Although the articles permit it and a special resolution was passed, the reduction needs confirmation by the Tribunal, where creditors such as Gupta may object. Registrar consent alone or an ordinary resolution is insufficient.

  1. AThe reduction needs confirmation by the Tribunal, and creditors may object before it, so the company cannot act on the special resolution aloneCorrect
  2. BThe special resolution alone is sufficient and creditors have no right to object
  3. CThe company may reduce capital only by an ordinary resolution and not by special resolution
  4. DThe reduction requires only the consent of the Registrar of Companies

Explanation

Reduction of share capital requires authorisation in the articles, a special resolution and confirmation by the Tribunal. The Tribunal considers objections from creditors and regulators. Hence the special resolution alone does not make the reduction effective.

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