Extinguishing Liabitity on shares?

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Avinasheswar (Querist)
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28 September 2007 What is meant by extinguishing liability on shares as provided in Section 100 ?
What is the difference between extinguishing liability and reducing liability on share capital?

R.V.RAO

R.V.RAO (Expert)
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28 September 2007 under sec 100 of co's act either you reduce the face value of a share from rs. 10 to rs. 8.
or the non paid up portion of say Rs. 5 is cancelled or extinguished. fixing face value at rs. 5 .
companies opting BIFR route in industrial sickness do same and reduce face value .But the existing shareholders including FIs and other lenders stand to lose and write off the lost portion of investments made in shares of borrower
C.A.R.V.RAO

Avinasheswar

Avinasheswar (Querist)
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28 September 2007 But what is the difference between EXTINGUISHING liability and REDUCING liability?Also what is meant paid up share capital which is lost or unrepresented by available assets?Is there any difference between CANCELLING, EXTINGUISHING and REDUCING share capital?

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R.V.RAO

R.V.RAO (Expert)
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28 September 2007 extinguishing or cancelling of liability is same.
REDUCTION IS BRINGING DOWN PAID UP VALUE.
A RS. 10 PAID UP SHARE MAY BE BROUGHT DOWN TO RS. 1 AS DONE BY COURT /BIFR ORDER.THE LIABILITY OF RS. 9 IS CANCELLED OR EXTINGUISHED.
PAID UP VALUE IS REDUCED FROM 10 AND BROUGHT DOWN TO 1.
EFFECT IS SAME .
IF SHARE CAPITAL IS RS. 100. IT SHOULD BE REPRESENTED BY TANGIBLE AND VALUABLE ASSETS ON ASSET SIDE.OTHERWISE CAPITAL IS LOST OR ERODED.
FOR EXAMPLE IF OUT OF RS. 100 PAID UP CAPITAL ( PLUS FREE RESERVES TOGETHER CALLED NETWORTH) YOU HAVE TO REDUCE ACCUMULATED LOSSES AND MISC. EXP. TO THE EXTENT NOT WRITTEN OFF.THEN YOU GET A NEGATIVE CAPITAL OR NAGATIVE NETWORTH .YOU CAN THEN SAY CAPITAL IS LOST AND IS NOT REPRESENTED BY AVAILABLE ASSETS.BUT WHERE DID IT GO? IT IS SIMPLY ERODED BY LOSSES.
R.V.RAO

Avinasheswar

Avinasheswar (Querist)
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29 September 2007 That means EXTINGUISHING,CANCELLING and REDUCING are same.right?Because section 100 also refers to CANCELLING paid up share capital.

CMA Gul S

CMA Gul S (Expert)
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17 October 2007 100. Special resolution for reduction of share capital

(1) Subject to confirmation by the 1[Tribunal], a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles, by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power, may-

(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up;

(b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets; or

(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company;

and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.

(2) A special resolution under this section is in this Act referred to as "a resolution for reducing share capital".

1. Substituted by Act 11 of 2003, sec. 14 for "Court".