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

Vihaan Foods Ltd. has a paid-up equity capital of Rs 10 lakh. Its articles allow reduction of capital. The board resolves to cancel Rs 2 lakh of paid-up capital that is lost and unrepresented by available assets, and proposes to carry this out by merely filing a notice with the Registrar. Which statement is correct?

The proposal is invalid. Reduction of share capital requires authority in the articles, a special resolution and confirmation by the Tribunal, even where the capital is lost or unrepresented by assets. A board resolution with notice to the Registrar is insufficient.

  1. AThe reduction must be authorised by articles, approved by a special resolution and confirmed by the Tribunal, so the proposal is not validCorrect
  2. BThe reduction is valid because capital lost or unrepresented by assets can be reduced without any approval
  3. CThe reduction needs only an ordinary resolution of shareholders and filing with the Registrar
  4. DThe reduction needs only the consent of creditors and no shareholder resolution

Explanation

A company limited by shares may reduce its share capital if authorised by its articles, by passing a special resolution and obtaining confirmation of the Tribunal. This applies even where the capital being cancelled is lost or unrepresented by assets. A mere notice to the Registrar, an ordinary resolution or creditor consent alone does not meet these requirements.

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