Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICSterm assets and leave a surplus which substantially covers current assets. Abalanced capital structure also implies that the gearing ratio should be optimal.When a company is faced by problems arising from imbalance in capitalstructure, it may have to carry out a capital reconstruction to redress theproblem. Capital reconstruction refers to the re-organisation of capital and/orre-arrangement of the rights of shareholders as between themselves in orderto revive an ailing company or transfer its operation to another company.Indicators of imbalance capital structure include overcapitalization,overtrading, unhealthy working capital ratio, excessive amount of reserve andcapital not represented by available assets.A capital reduction is a scheme approved by the court in which the nominal orpar value of a company’s paid up share capital is reduced.3.9.1 The General RuleThe general rule, going by section 105 of CAMA, 1990, is that a companyis not permitted to reduce its share capital.3.9.2 ExceptionsA company, however, may reduce its issued share capital on fulfillmentof the following conditions;(a) It must be authorised by its articles;(b) It must be by a special resolution passed at a general meeting;(c) The resolution must specify the amount of reduction; and(d) The capital reduction must be approved by the court.The purpose of requiring court’s approval is to ensure the protection of creditorswhose interest may be jeopardized should the company embark on the capitalreduction scheme. They are, therefore, entitled to object to the scheme.Specifically, Section 107(4) requires the company to apply to the court for anorder confirming the reduction, after passing a special resolution, while section107(2) provides that every creditor of the company who is entitled to any debtor claim admissible in proof against the company shall be entitled to object tothe scheme if;(a) The proposed reduction of share capital involves a diminution ofliability in respect of unpaid share capital; and(b) It involves the payment to a shareholder of any paid up share capital orany other form of reduction.Section 107(4) empowers the court to settle the list of creditors entitledto object to the scheme.All these provisions are to ensure that the creditors are protected anddo not suffer any loss as a result of the capital reduction scheme unlessthey allow it by refusing to come forward and object when their interestis not protected.50