Reduction of share capital of a company

Reduction of share capital of a company Section 100 of the companies Act,1956
As far as a sole trader is concerned, his capital is the excess of assets over liabilities. He can withdraw the capital from his business as he likes. Such a withdrawal will not affect his creditors. This is because his creditors can look to his assets for the satisfaction of their claims. The matter is same in the case of partnership also.
The situation is entirely different in the case of a Company. The assets of the Company are not the assets of the members. Like, the assets of members are not the assets of the Company. Here, a creditor can only look to the assets of the Company. He cannot look beyond the Company and make the assets of the members liable for his claims.
Thus for a Company, capital is a fund, which must be maintained intact. The capital cannot be returned to the members even masked as dividend. Section 205 of Companies Act, 1956 provides that dividend shall be paid only out of profits.
But a Company can reduce its share capital, if the Articles of Association of the Company allows it and subjected to the approval of the Tribunal. Section 100 provides for it. Here the reduction of capital means reduction of issued, subscribed and paid up capital of the Company not the authorized capital.
Let us look into a situation where a Company trades at a loss year after year. After years, the capital of the Company will not be represented by the assets. So to make the capital truly representing the assets, it has to reduce the capital. Capital can be reduced Under the following situations:
1.   When capital is not represented by the assets; and
2.   A situation of over capitalization.
The Tribunal will not allow reduction of capital unless the interests of creditors, members and public at large are safe guarded. The Act does not prescribe any manner for reduction of share capital. The following types are commonly adopted by Companies.
1.		Reduction of liability of members in respect of un called or unpaid capital
			Rs. 5 has been paid for a Rs.10/- share. The Company may reduce the unpaid amount to Rs.2/- instead of the present Rs.5/-.
2.		Extinguishment of liability of members in respect of unpaid share capital.
			Rs. 5 has been paid for a Rs.10/- share, the Company can extinguish the liability to pay the unpaid amount of Rs.5/-.
3.		Paying off paid up capital not required for the business of the Company.
			Shares are Rs.10/- fully paid up, Company can reduce them to Rs.5/- and paying back Rs.5/- per share.
4.		Purchase of shares by directors.
5.		Cancellation of all the share capital as part of arrangement.
Fewer than two situations, reduction of capital can be effected without the sanction of Court or Tribunal. They are:
1.   Surrender of shares; and 2.   Forfeiture of shares. In both cases, the membership is terminated. Both are effective only if Articles of Association of the Company allows it.
Other situations:
1.	In the case of oppression and mismanagement, the Tribunal has special powers under Section 397 and 398. Apart from this, the Tribunal has special powers under Section 402. This Section grants power the Tribunal to order the purchase of the shares of any member by the Company; and that will result into reduction of share capital. In this case special resolution is not necessary.
2.	Registrar of Companies has been empowered to write off the name of  defunct Company. In such a case, a reduction of capital cannot be prevented (Great Universal Stores Limited , Re (1960))
3.	An unlimited Company to which Section 100 does not apply can reduce the capital in any manner as its Articles of Association allows (Borough Commercial and Bldg. Society (1893))
4.	Where different amounts are paid up on shares of the same class, the reduction can be effected by equilising the amount so paid(Marwari Stores Limited v. Gouri Shanker Goenka (1936))
5.	The certificate issued by Registrar of Companies confirming reduction is conclusive even later it was discovered that the Company had no authority under its Articles of Association to reduce the capital (Re Walkar & Smith Limited(1903))