“The capital of may no doubt be diminished the expenditure upon and reasonably incidental to all the objects specified. A part of it may be lost in carrying on the business operations authorized. Of this, all persons trusting the company are aware and take the risk. But creditors have the right to rely and were intended the legislature to have the right to rely on the capital remaining undistributed any expenditure outside these limits or the return of nay of it to the shareholders”.
Per Lord Herchell L.J. in Trevor v Whitworth (1837) 12 App. Cap 409 at 415.
Discuss this statement outlining the circumstances and conditions under which companies may reduce their capital.
ANSWER
Circumstances and conditions under which companies may reduce their capital
• The issued capital of the company whether paid up or not must be maintained.
• It is in principal regarded as a permanent fund or a fund of last resort available to all creditors in the event of default the company.
• The capital of a registered company must remain certain. It acts as a guarantee that creditors will be paid. Creditors are entitled to insist that no part of the company‟s capital is wasted or returned to members.
• Creditors and other persons who deal with companies are aware that the companies have an amount of capital and are entitled that to insist no part thereof is returned to members without due compliance with law.
• It is therefore a fundamental principle that of company law that capital be maintained.
• Company Law has evolved both statutory provisions and prepositions of common law to facilitate the raising and maintenance of capital. One of these provisions is that the company should only reduce capital in accordance with the provisions of the Companies Act. These provisions of the companies act prescribe the circumstances and conditions under which a company may reduce capital.
i) Authority of the Articles
Under the Companies Act a company limited shares or guarantee and having a share capital may reduce its capital of authorized its articles.
ii) Special Resolutions
Under the Act reduction of capital of capital a company must be authorized a special, resolution of members in general meeting. This resolution is referred to as “resolution for reducing share capital”. The reduction of capital may take the form of:
Reducing or extinguishing liability on any unpaid up capital.
Cancellation of any paid up capital, which is lost or unrepresented available assets.
Paying off any paid up capital, which is in excess of the wants of the company.
iii) Application to court for confirmation
Under the Act after the special resolution is passed an application must be made to the High Court for confirmation of the reduction. The essence of the application is for the court to satisfy itself that the reduction does not unfairly prejudice the position of any class of members or creditors. In particular the court must settle a list of all creditors and must satisfy itself that any creditor entitled to object to the reduction has either objected or consented to the same. In the case of an objection the court must be satisfied that the creditors claim or debt has been discharged, determined or secured. If the court is so satisfied it may confirm the reduction.
iv) Confirmation of the reduction
Under the Act, if the court is satisfied that creditors entitled to object to have consented or in the case of an objection, the creditors claim or debt has been discharged, determined or secured it may make an order confirming the reduction on such terms and conditions as it deems fit. The court may for any special reason if it deems fit order the company to add the words “and reduced” to it’s name for a specified duration. Such words form part of the company’s name for the duration of the order.
v) Registration of the reduction
Under the Act upon production of a certified court order approving the reduction and the minute of the same the registrar registers the reduction and issues a certificate of registration, which is conclusive evidence that the requirements of the act relating to reduction of capital have been complied with. A reduction of capital a company take effect when registered and notice of registration must be published in accordance with the courts direction
Underwriting Commission
This is the amount or sum paid the company to a person who agrees to underwrite the company’s shares i.e. take up all the shares or a specified number of the shares not taken up the public. It’s payable whether the person (Underwriter) takes up the shares or not. It must be disclosed in the company’s prospectus.
Brokerage
This is an amount paid the company to a person or persons who agrees to place the company’s shares i.e. exhibits the company’s prospectus in their premises or send copies to their clients, but without incurring any liability on the shares.
It is an amount only payable to brokers.
It must be disclosed in the company’s prospectus.