Reduction of share Capital

The legal framework concerning a company's capital holds a certain level of sanctity. Guided by general principles based on public policy and strictly enforced by the courts, the prevailing notion is that any action leading to a reduction of capital should only be permissible under specific conditions:

Statutory Authority or Forfeiture: A reduction of capital should only occur under statutory authority or through the forfeiture of shares. Any deviation from this, without proper authorization, is deemed illegal and ultra vires.

Adherence to Article Procedures: The reduction of capital must strictly adhere to the procedures outlined in the company's articles of association. Any reduction not in line with these principles is considered illegal.

Reduction of capital can be accomplished through different methods, including:

Reduction without Court Sanction:

i. Forfeiture of Shares: The company, if empowered by its articles, can forfeit shares due to non-payment of calls. This results in the forfeiture of shares unless they are re-issued.

ii. Surrender of Shares: The company may accept the surrender of partly paid shares, avoiding the formalities of forfeiture.

iii. Cancellation of Shares: With the authorization of its articles, the company may cancel shares that have not been taken or agreed to be taken by any party, reducing the share capital by the canceled amount.

iv. Redemption of Redeemable Preference Shares: The company may redeem preference shares following the provisions of the ordinance.

It's crucial to note that any reduction in capital must align with these authorized methods and comply with the legal procedures outlined in the articles of association.

Reduction of capital with the consent of the court.

Reduction of capital through means other than those previously mentioned must adhere to the provisions of sections 68–72. Notably, under the Companies Act, the reduction of share capital does not apply to an open-ended investment company established under the Capital Markets and Securities Act, as specified in Section 68. An open-ended investment company (OEIC) is one that can redeem its shares for cash and manages investments on behalf of its members.

According to these sections, a company, whether limited by shares or guarantee, can reduce its capital provided that:

i. It is authorized by the articles.

ii. A special resolution to this effect has been passed.

iii. The reduction has been confirmed by the court.

Section 69 grants the company the authority to reduce its share capital in various ways, specifying:

i. Extinguishing or reducing the liability of members concerning uncalled or unpaid capital. For instance, if shares are originally Tsh 10,000 each with Tsh 600 paid up, the company may reduce them to Tsh 6,000 fully paid, thereby releasing the shareholder from a liability of Tsh 4,000 on uncalled capital.

ii. Paying off or returning part of the unpaid capital not required for the company's purposes. For example, if shares are fully paid at Tsh 10,000 each, they may be reduced to Tsh 4,000 each, and the remaining Tsh 6,000 can be refunded to shareholders.

iii. Canceling paid-up capital lost or unrepresented by available assets, either with or without extinguishing or reducing the liability on any shares. For instance, due to substantial trading losses, a company reduces its equity shares from Tsh 10,000 each fully paid to Tsh 2,000 per share.

The prescribed procedure for reducing share capital involves:

i. Passing a special resolution, accompanied by:

Director's certificate of solvency.

Auditor's report. Directors providing a solvency certificate without reasonable grounds may face imprisonment, fines, or both.

ii. Advertising the resolution in the gazette and, for public companies, in one national newspaper within five working days of passing the resolution.

iii. Allowing creditors to object to the reduction by applying to the court within twenty-eight days of the resolution's advertisement.

iv. Filing the resolution with the Registrar within thirty-five days from the date of passing the resolution.