SHIN&KIM Legal Update Capital Reduction Procedure under the Amended Korean Commercial Code

Although it is uncommon, a business might employ a capital decrease to give its shareholders ownership of actual assets. Shareholders receive distributions from their assets as payment in return. If the necessary steps are taken to protect creditors, the value of the distributed property may be greater than the amount by which the share capital is diminished. It can be used to simplify a company’s capital structure, making it more efficient.

“buy-back” means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies. https://online-accounting.net/ However, before the amendment, it referred to the particular section i.e. the section 77A of the Companies Act,1956 and not the Act.

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A minority shareholders though in form gets back the whole or a part of the capital contributed by him, in effect he gets a share of the accumulated profit, which if a straight forward course was followed, he should have received dividend. This is elimination of minority under the guise of reduction of capital. The creditors having a debt or claim admissible in winding up are entitled to object. To enable them to do so, the Court will settle a list of creditors entitled to object. If any creditor objects, then either his consent to the proposed reduction should be obtained or he should be paid off or his payment be secured. The Tribunal, in deciding whether or not to confirm the reduction will take into consideration the minority shareholders and creditors.

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Understanding Capital Reduction

Share capital is to be paid to shareholders no earlier than three months following the entry of reduction in the commercial register. Therefore, in case of slump sale, section 180 shall get attracted and a special resolution of the members shall be required.

Under the CO, a company can undergo an alternative court-free process to reduce its capital, subject to passing the Reduction of share capital uniform solvency test. I believe that I have convinced the reasons for the answer given by me the second question.

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In the event of a loss or if it does not have enough distributable reserves to redeem its shares and does not intend to issue new shares, a corporation may decide to lower its capital. After that, the shares are redeemed for cash equal to the proceeds of the redemption.

As generally understood, capital reduction is uniform for all the shareholders of the particular class. In this case, it can be compulsory for all the shareholders to abide by the order of the honourable NCLT confirming the special resolution of the shareholders for the size, amount and other terms of the reduction. Cancel paid-up share capital by the creation of a reserve, to be called ‘the capital reduction reserve fund’, which will be subject to the same treatment as the share premium account. Reduction of Share Capital.The Company may, by a resolution of the Directors, reduce its share capital in any way provided that the Board is satisfied, on reasonable grounds, that the Company will, immediately after such reduction, satisfy the Solvency Test.

Company

Although an auditor’s statement is not mandated, it is wise to engage certified accountants to assess the current financial wellbeing of the firm and the impact of capital reduction on the same. The directors should also consider starting the process for reduction when audited financial statements have been made available. This will help ensure the variation in the company’s financial status is minimal from the time of initiating the process and date of approval.

However, the matter was settled by the decision of the Supreme Court in the case of G. Narasimhan 102 Taxman 66 , wherein it was held that any distribution over and above the accumulated profits would be chargeable to capital gains tax in the hands of the shareholders. It was also held that reduction in capital will be construed as a transfer within the meaning of section 2 of the Act.

Maintenance and Reduction of Capital

Company may reduce share capital by paying off fully paid up shares which is in excess of the wants of the company. This option is adopted when company has surplus funds and company do not want to use the funds for its business.