Reduction of the Share Capital :

It is to the capital of the company which members have invested or undertaken to invest and the assets represented thereby, that creditors look for the satisfaction of their claims. This has, therefore, been the principle, of the Company Law that share capital shall be reduced only subject to special safeguards.

Section 100 of the Companies Act, 1956 provides that a company, limited by shares or guarantee and having share capital, if so authorised by the articles, may by special resolution and the confirmation of the Court, reduce its share capital in any way and in particular by:

(a) extinguishing or reducing the liability of members in respect of the capital not paid up;

(b) writing off or cancelling any paid-up capital which is lost, or is not represented by available asset;

(c) paying off any paid-up share capital which is in excess of the needs of the company .

Reduction in (b) and (c) may be made either in addition or without extinguishing or reducing the liability of the members for uncalled capital.

Reduction of share capital may in reality take three forms, namely, (i) reducing the value of shares in order to absorb the accumulated losses suffered by the company without any payment to the shareholders ; (ii) extinction of liability of capital not paid ; and (iii) paying off any paid-up share capital. Only in the circumstances referred to in point (ii) and (iii) the interest of creditors really involved.

[Note: This section of the Companies Act, 1956 is to be replaced by the section 66 of the Companies Act, 2013 which deals with the reduction of share capital. This section is not yet notified. For reference see the annexure]