A company is empowered by section 63 to alter the provision of its memorandum which relates to its authorized capital.
The power is exercisable if:-
(i) The articles confer the authority to alter its capital.
(ii) The company holds a general meeting for the purpose of altering the capital.
(iii) The alteration is authorized by an ordinary resolution.
Mode of Alteration
Section 63(1) provides the various modes of altering its capital:-
(a) Increasing its share capital by issuing new shares.
(b) Consolidate and divide all or any of its share capital into shares of larger amount than the existing ones.
(c) Convert all or any of its fully paid up shares into stock or reconvert that stock into fully paid up shares of any denomination.
(d) Subdivide its shares into shares of smaller amount than is fixed by the memorandum.
(e) Cancel the shares which have not been taken by any person and diminish the amount of its share capital. This mode of alteration is called “diminution” of capital.
Under Section 63, no alteration of capital can be valid unless:-
(i) It is authorized by the articles of association.
(ii) It is approved by the company at a general meeting.
Increase in Share Capital
The nominal share capital of a company may be increased by ordinary resolution of the company in the general meeting. The articles usually contains authority to allow the company to increase its capital, but incase it does not allow, they must be altered by special resolution to this effect.
Under Section 65, where a company has increased its share capital beyond the registered capital, notice must be given to the registrar within 30 days from the date of passing such a resolution. Otherwise, the directors and the company knowingly permitting the default will be liable to a fine of Sh. 100.
Reduction of Capital
The law regards capital of a company as something sacred. No action resulting in a reduction of capital of a company should be permitted unless the reduction is effected:-
(i) Under statutory authority or by forfeiture.
(ii) In strict accordance of the procedure set out in the articles of association. Any reduction contrary to this principle is illegal and ultra vires.
The general rule is that it is illegal for a company to reduce its capital because such a reduction would be tantamount to reducing the security available to the company’s creditors. However section 68(1) authorizes a company to reduce its capital if:-
(a) The company’s articles authorize it to do so. If the articles do not confer the authority the can be amended by the inclusion therein of the requisite authority.
(b) The company passes a special resolution to that effect.
(c) The court confirms the proposed reduction. This is required to protect the interest of the company’s creditors.
Reduction of capital may be effected in several ways:-
(i) Where redeemable preference share are redeemed.
(ii) Where shares are perfected for non payment of calls.
(iii) Where un issued shares are cancelled.
(iv) Reduction of liability on any of its shares in respect of share capital not paid-up.
(v) Cancel any paid up share capital which is lost or is unrepresented by the available assets, that is, “diminution”. For example, some of the capital may, in fact have been lost or diminished, for instance, Sh. 100 shares may represent asset of Sh. 50.
(vi) Pay off any paid up share capital which is in excess of the wants of the company.
Section 68 gives the company the power to reduce its share capital in any way but specifically mentions ways in which the reduction of capital may be effected in order to extinguish or reduce the liability on shares not fully paid.
Under Section 69 where a company has passed a resolution for reduction of capital, it must apply to the courts for an order confirming the reduction. Where the reduction of share capital involves diminution of liability for unpaid capital or return to any shareholder of any paid up share capital, the courts may allow all creditors to object to reduction.
The court will settle a list of company’s creditors and hear their objection and the court will confirm such a reduction if they are satisfied that:-
(i) The creditors’ consent to reduction has been obtained.
(ii) Their debts have been discharged.
(iii) Their debts have been secured by the company.
Liability of Members on Reduction
On reduction of capital, the members of a company whether present or past are not liable beyond a certain limit. The liability of members is limited to the difference if any between the amount of the share as fixed by the minute and the amount paid. However, in certain cases, the liability of the members will not be reduced even though there has been a reduction of capital. If the company is unable to pay the claim of any creditor entitled to object who was ignorant of the proceedings for reduction or of their nature and effect and who was not entered on the list of creditors, then:-
(i) Every member of the company at the date of the registration of the order for reduction will be liable to contribute for the payment of that claim an amount not exceeding the amount which he would have been liable to contribute if the company had commenced to be wound up on the day before that registration.
(ii) If the company is wound up, the courts, on application of such creditor and upon proof of his ignorance of the reduction, may accordingly settle a new list of contributories who could be forced to pay as if they were ordinary contributories in a winding up.
Maintenance of Capital
The issued share capital of a company limited by shares is the primary security for the company’s creditors. A limited company by its memorandum declares that its capital is to be applied for the purpose of the business. The creditors give credit to a company because of capital and therefore the capital of the company should not be “watered down”. Many provisions in the Act attempt to prevent capital being watered down such as making it illegal for a limited company to issue shares at a discount unless provision of Section 59 is complied with.
Purchase of Own Shares
According to a leading case Trevor vs. Whitworth, it is illegal for a limited company to purchase its own shares. Such a purchase, if permitted would constitute an indirect reduction of the paid up capital. It is presumed that whenever a company buys its shares it would do so by utilizing its paid up capital.
Despite the rule in Trevor v Whitworth, a company may purchase or acquire its own shares in the following cases:-
(a) where it is a purchase of redeemable shares,
(b) where the shares are purchased pursuant to a court order under Section 211 (2) on application by oppressed members and
(c) where the shares are forfeited for non-payment of a call.