What is Alteration of Share Capital?

According to Section 2(3) of the Companies Act 2013, “alter” or “alteration” includes the making of additions, omissions and substitutions”. When a company’s existing share capital has to changed, then the Alteration of share capital happens. It must be authorized by the Articles of Association. As the shares of the company are subscribed by the public, the company’s Memorandum of Association has to be changed. When a company’s capital is increased it is good for the company. 

Power of ltd companies to alter its share capital

According to section 61 of the Companies Act, 2013, a company limited by shares can alter the capital clause of its Memorandum in any of the following ways provided that such alterations authorized by Articles of Association of the company. 

1. Increase in share capital by such amount as it thinks expedient by issuing new shares
2. Consolidate and divide all or any of its share capital into shares of large amount than its existing share.
3. Convert all or any of its fully paid shares into stock and re-convert stock into fully paid shares of any denomination.
4. Subdivide shares or any of shares into smaller amounts fixed by the Memorandum so that in subdivision the proportion between the amount paid and the amount if any unpaid on each reduced shares shall be same as it was in case of from which the reduced share is derived and 
5. Cancel shares have not been taken or agreed to be taken by any person and diminish the amount of the share capital by the amount of the shares so cancelled. 

However, the cancelation of shares shall not be deemed to be a reduction of share capital.

The alteration of the capital of the company in any of the manner written above can be done by passing a resolution at the general meeting of the company and does not require any confirmation by the National Company Law Tribunal. 

Notice to be given to the Registrar (Section 64)

Within 30 days of alteration, notice must be given to the Registrar who will record the same and make necessary alteration in the Company’s Memorandum and Articles. Notice to the registrar has similarly to be given when redeemable preference shares have been redeemed. Similar information is also required to be sent where the capital has been increased beyond the authorized limit, or where a company, being not limited by shares, has increased the number of its members. Any default in giving notice to the registrar renders the company and its officers in default liable punishment with fine which may extend to Rs. 1000 for each day.

Section 94 of the Companies Act 1956

 Powers under this section can be exercised only if authorized by the articles. In, Re, Patent Invert Sugar Co., (1885) 31 Ch D 166, it was held that if the article does not contain any such authorization, then the articles must be amended first, before the power could be exercised. In Re, Metropolitan Cemetry Co., (1934) SC 65 (Scot), the company passed special resolutions to reduce and also to increase its capital and the court, while confirming the former, refused to include a reference to the latter as the company was not authorized by its articles to increase its capital and strict compliance with the main enactment was necessary. The power should be exercised bona fide in the interest of the company and not for benefiting any group. That is why an agreement between shareholders requiring a written consent of all the shareholders before this power was exercised was held to be void. But a shareholders’ agreement as to how to vote on occasions like this may bind them as between themselves and without fettering the company’s powers. [Russell v. Northern Bank Devp. Corpn. Ltd., 1992 BCLC 1016: (1993) 3 Comp LJ 45 HL]

Increased of authorized share capital [Section 94(1)(a) of the Companies Act 1956]

The consent of meetings of classes of shareholders will not be compulsory as the increase of any kind of share capital cannot be said to vary class rights. [White v. Bristol Aeroplane Co. Ltd., (1953) 1 AII ER 40 (CA); Re, John Smith’s Tadcaster Brewery Co. Ltd., (1953) 1 AII ER 518 (CA). Subject to any directions that may be given by the company in general meeting the increased share capital will have to be issued in accordance with the provisions of section 81 of the 1956 Act. In the case of a public company, it appears that the provisions of section 81 of the 1956 Act are mandatory and general body cannot give any contrary directions. According to the provisions in Regulations 44 and 45 of Table A of the 1956 Companies Act the power of increase, given by this section can be implemented by an ordinary resolution.

In case where Table A of the 1956 Act is not applicable it would appear that a special resolution may become necessary because the capital clause of the memorandum would have to be altered. The increased capital may consist of preference shares, provided that this is not inconsistent with rights given by the memorandum of association. [ Andrews v. Gas Meter Co., (1897) I Ch 361 (CA)]. The notice convening the meeting to pass the resolution for increase must specify the amount of the proposed increase. [MacConnel v. E Prill & Co. Ltd., (1916) 2 Ch 57.]

Where shares were issued beyond the authorized amount and a resolution was subsequently passed at a general meeting ratifying the issue, it was held that although the original issue was not in accordance with the articles, the ratification was effective and the allottees bound. [Sewell’s case, (1868) 3 Ch App 13].

Shareholders who have acquiesced in the irregular increase of the share capital cannot later challenge such an increase. [ Re, Athenaeum Life Assurance Society; Richmond’s case, Painters’ case, (1858) 4 K & J 305]. Where a company proposed to increase its issued and paid-up share capital and some shareholders filed a petition against it, saying that it would be of oppressive nature, the CLB said that the power of the Board of Directors was not to be restricted by the CLB. An injunction was not granted. Rather, the CLB permitted raise in issued and paid-up capital for bona fide reasons. [Girish Gupta v. Tirupati Roller Flour Mills P. Ltd., (2007) 138 Com Cases 549: (2007) 79 SCL 282 (CLB)].

Effect of provisions in articles on power to increase capital 

In a case, before the High Court of Bombay, Miheer Hemant Mafatlal v. Mafatlal Industries Ltd., (1987) 89 Bom LR 86 (Bom) the articles of a company happened to contain two contradictory provisions one of them permitting increase of capital by an ordinary resolution in the terms of section 94 of the 1956 Act and another replacing a limit beyond which the capital of the company would not be increased. The court held that such textually inconsistent provisions must be read subject to cross references reconciling them. Further, the article which restricted the power to increase the capital of the company beyond a certain amount would be void in itself because it has the effect of taking away the power conferred by section 94 of the 1956 Act upon every company to increase its capital by an ordinary resolution.

References

1. Company Law, A. Ramaiya
2. Elements of Company Law, N.D. Kapoor
3. Company Law, N.C. Jain
4. Company Law, Avatar Singh
5. https://ebizfiling.com/blog/alteration-of-share-capital/ 

Aishwarya Says:

Law students often face problems, which they cannot share with their friends and families. We have started a column on our website Student’s Corner. In this column we are talking to several law students about the challenges that they face. Students who are interested in participating in the same, can fill this Google Form.

IF YOU ARE INTERESTED IN PARTICIPATING IN THE SAME, DO LET ME KNOW.

The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.

If you would also like to contribute to my website, then do share your articles or poems to aishwarya@aishwaryasandeep.com

Join our  Whatsapp Group for latest Job Opening