Companies Act, 2013 - Share Capital and Debentures
Sections 65 and 66 of the Companies Act, 2013: Reserve Share Capital and Reduction of Share Capital
Sections 65 and 66 deal with two different aspects of company share capital. Section 65 permits an unlimited company with share capital, when registering as a limited company, to create capital that can be called only on winding up. Section 66 provides the statutory mechanism by which a company limited by shares, or a company limited by guarantee having share capital, may reduce its share capital subject to a special resolution and confirmation by the National Company Law Tribunal (NCLT).
Section 65: Unlimited company to provide for reserve share capital on conversion into limited company
Meaning: Section 65 applies to an unlimited company having share capital that proposes to register as a limited company. The section permits the company, by the resolution for registration, to create a portion of capital that is effectively reserved for use if the company is wound up.
An unlimited company having a share capital may, by a resolution for registration as a limited company under the Companies Act, 2013, do either or both of the following:
- increase the nominal amount of its share capital by increasing the nominal amount of each share, provided that the increased portion cannot be called up except in the event and for the purposes of winding up; and
- provide that a specified portion of its uncalled share capital cannot be called up except in the event and for the purposes of winding up.
In practical terms, the protected portion is not available for ordinary calls during the company's normal operations. It is reserved as an additional source of capital in a winding-up situation.
Section 66: Reduction of share capital
Meaning: Reduction of share capital is a statutory reorganisation of a company's issued share capital. Under Section 66, an eligible company may reduce its share capital in any manner permitted by the section, but the reduction requires a special resolution and confirmation by the NCLT.
Who may use Section 66?
A company limited by shares, or a company limited by guarantee and having share capital, may apply under Section 66. The reduction is subject to confirmation by the Tribunal.
Permitted modes of reduction
Section 66 specifically recognises, among other permissible methods, the following:
- extinguishing or reducing liability on shares in respect of share capital that is not paid up;
- cancelling paid-up share capital that is lost or is unrepresented by available assets; and
- paying off paid-up share capital that is in excess of the wants of the company, with a corresponding alteration of the memorandum and share capital.
Accounting treatment
The Tribunal cannot sanction the application unless the proposed accounting treatment conforms to the accounting standards specified under Section 133 or other applicable provisions of the Act, and the company's auditor files a certificate to that effect.
Section 66 does not govern buy-back
Section 66(6) expressly provides that Section 66 does not apply to a company's buy-back of its own securities under Section 68 of the Companies Act, 2013.
Procedure for reduction of share capital under Section 66
The detailed procedure is contained in the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016. The principal steps are summarised below.
- Corporate approval: The company passes the required special resolution for reduction of share capital.
- Application to NCLT: The company applies to the Tribunal in Form RSC-1 with the prescribed supporting documents and fee.
- Creditor information and auditor certificates: The application is accompanied by the prescribed list of creditors and auditor certifications, including certification concerning the creditors' list, deposit arrears and accounting treatment.
- Notices: The Tribunal issues, or directs issue of, notices to the Central Government, Registrar of Companies and, for a listed company, the Securities and Exchange Board of India. Creditors are also notified in accordance with the Rules.
- Representations and objections: Section 66 provides a three-month period for representations by the notified authorities and creditors. Where no representation is received within that period, absence of objection is presumed for the purposes stated in the section.
- Creditor protection: The Tribunal considers whether debts or claims of creditors have been discharged, determined or secured, or whether creditor consent has been obtained.
- NCLT confirmation: If the statutory requirements are met, the Tribunal may confirm the reduction on such terms and conditions as it considers fit.
- Registration with ROC: A certified copy of the Tribunal's order and the approved minute must be delivered to the Registrar within thirty days of receipt of the order. The Registrar registers them and issues the prescribed certificate.
Protection of creditors and members
Creditor protection is central to Section 66. The Tribunal considers objections and may confirm the reduction after being satisfied regarding discharge, determination, security or consent in respect of creditors' debts or claims.
Section 66 also protects a creditor whose name was omitted from the list because the creditor was unaware of the reduction proceedings or their effect on the debt or claim. Where the statutory conditions in Section 66(8) are met and the company later commits a default within the meaning of Section 6 of the Insolvency and Bankruptcy Code, 2016 in respect of that debt or claim, the provision can impose a limited contribution liability on persons who were members when the reduction order was registered.
A past or present member is generally not liable, in respect of a share held by that member, beyond the difference specified in Section 66(7) between the amount treated as paid on the share and the amount of the share fixed by the reduction order.
Concealment or misrepresentation of creditor claims
If an officer knowingly conceals the name of a creditor entitled to object, knowingly misrepresents the nature or amount of a creditor's debt or claim, or abets or is privy to such concealment or misrepresentation, Section 66(10) makes the officer liable under Section 447.
Important forms under the 2016 Reduction of Share Capital Rules
| Form | Purpose |
|---|---|
| RSC-1 | Application to the NCLT for confirmation of reduction of share capital. |
| RSC-2 | Notice to the Central Government, Registrar of Companies and, where applicable, SEBI. |
| RSC-3 | Notice to creditors. |
| RSC-4 | Publication of notice concerning the reduction application. |
| RSC-5 | Affidavit confirming dispatch and publication of notices. |
| RSC-6 | Order confirming reduction of share capital and approving the minute. |
| RSC-7 | Certificate of registration of the Tribunal's order and minute by the Registrar. |
Important statutory updates reflected in Section 66
Section 66(8) was amended consequentially by the Insolvency and Bankruptcy Code, 2016 so that the provision now refers to a company committing a default within the meaning of Section 6 of that Code in respect of the relevant debt or claim. Former sub-section (11) of Section 66 was omitted by the Companies (Amendment) Act, 2020 with effect from 21 December 2020.
Official legal resources
For the authoritative statutory text and current filings or regulatory information, refer to the official resources below:
This article is a general legal information resource. Statutory provisions, rules, notifications and filing requirements should be checked in their current official form before taking action.