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 liquidation.Reduction of Share
CapitalA company may reduce its shares by:Extinguish or reduce the
liability on any of its shares in respect of share capital not paid
upCancel any paid up capital which is lost or unpresented by
available assets;Pay off any paid up share capital which is in
excess of the needs of the company.
Exception Sec 64Where 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.Extinguish or reduce the liability on any of its shares in
respect of share capital not paid upA company may lose money during
its trading & the amount shown as paid up capital in a cos
financial statement may no longer reflect the value of assets.Co
may wish to cancel some of its capital so that the balance sheet
would gives more accurate view of the companys financial
position.Cancel any paid up capital which is lost or unpresented by
available assetsRe Fowlers Vacola Manufacturing Co LtdCo sold a
substantial part of its business operations which resulted in
excess capital to members.Pay off any paid up share capital which
is in excess of the needs of the companyAuthorization from the
articles Table Article 42A special resolution in general meeting
andConfirmation by the court (High court + by way of
petition)Procedure for reduction sec 64 (1)Sec 64 (2) (a) creditors
entitled to object;
Sec 64 (2) (c) (i) & (ii) payment of creditors debtCreditors
rights sec 64 (2)The consent of the creditors who are entitled to
object has been obtained or
Their debts and claims have been discharged determined or
securedsec 64 (4)Court may order reduction if:Merchant Credit Pte
Ltd v Industrial & Commercial Realty Co. Ltd (1983)
A company limited by shares cannot return the capital to the
shareholders.
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;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;
CaseSec 62 (1) (e), (2) cancellation of shares not a
reductionSec 61 redemption of redeemable preference sharesSec 60
(3) (e) & (f) application of share premium accountSec 181 (2)
(c) court orderOther reduction permittedPaying off preference
shareholders depends on whether the class rights would have been
affected upon winding up.
If what is proposed (reduction) is in accordance with the class
rights upon winding up; there is no variation.Is reduction
variation?F: General meeting passed a special resolution - paying
off the preference share capital. Preference shareholders; no class
meeting & court could not confirm.
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 LtdF: AOA- rights of
any class were to be deemed to be varied by the reduction of the
capital paid up on those shares. Co proposed paying off its
preference shares and cancelling them.
COA: It was a reduction; there should be separate class
meeting.
Re Northern Engineering Industries plcA company cannot use the
funds or money which it has raised from the shareholders to pay
dividendsIllegal return of capital to the shareholdersFraud on the
creditors as the company would be less able to pay its
debts.DividendsNo dividend shall be payable to the shareholders of
any company except out of profits or pursuant to section 60 (sec 60
(3) (c).Art 100 of Table A.Sec 365 (1)Conditional right- depends on
the existence of profits- decision is a matter of internal
managementRights of a shareholders to dividends If declared debts
owed by the company to the shareholders;Cannot be revoked,
cancelled or reducedHilton International- D should be paid out of
profits- No D; if co. insolvent or jeorpadize cos balance sheetChip
Thye Enterprise Pty Ltd- Not justify to declare D when the co is
insolventBy cashBy issue of fully paid up shares (bonus shares) sec
60 (premium account)Sec 67A (3B): treasury shares (share
dividend)Method of payment of dividendsDeclaration of the dividend
by competent authority;Payment2 steps involvedCompany in general
meeting, subject to the amount recommended by the directors (Art
98)Industrial Equity Ltd v Blackburn- It is possible for the
articles to vest the power to declare dividends in the
directors.Who may declare dividends Marra Development Ltd
- 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 paidAvailable of profitsProfits belonging
to a subsidiary could not be applied for the payment of its
holdingIndustrial Equity Ltd v BlackburnSec 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.Effect of ContraventionArticle 99Its
declaration does not create a debt May revoke before
payment.Interim Dividends
