As a business owner or director, it’s easy to focus on daily operations and overlook how your company’s capital structure is governed by law. But understanding the concept of stated capital and the legal procedures around capital reduction is crucial—especially if you’re issuing shares, restructuring, or planning to distribute profits.

Let’s break down Sections 58 and 59 of the Companies Act, No. 07 of 2007 (Sri Lanka) in simple terms, with examples and compliance tips.


📊 What Is “Stated Capital”?

Stated capital refers to the total amount your company has received (or is entitled to receive) for issuing shares. It forms the legal base of your company’s funding.

It includes:

  • 💵 Money received when issuing shares,
  • 📄 Unpaid amounts on shares (called “calls”),
  • 🏠 Non-cash contributions (e.g., equipment, land, or services) — but these must be valued in money terms by the board.

🔍 Real-Life Examples

Example 1: Cash Share Issue
ABC (Pvt) Ltd issues 1,000 shares at Rs. 100 each.
Stated Capital = Rs. 100,000

Example 2: Non-Cash Contribution
XYZ Ltd issues shares for a delivery van. The board values it at Rs. 2 million.
Stated Capital = Rs. 2 million

Example 3: Services in Exchange for Shares
A shareholder builds a website worth Rs. 500,000.
The board recognizes the value, and it’s treated as a paid call.
Stated Capital increases by Rs. 500,000


🔻 Can a Company Reduce Its Stated Capital?

Yes—but only under strict conditions set by Section 59 of the Act. This process is called reduction of stated capital, and it’s tightly regulated to protect creditors and shareholders.


✅ Legal Process to Reduce Stated Capital

1️⃣ Pass a Special Resolution

You need at least 75% shareholder approval to reduce your capital.

2️⃣ Give Public Notice

You must publish a notice at least 60 days before passing the resolution.

3️⃣ Respect Creditor Agreements

If your company has promised a creditor that it won’t reduce capital below a certain level without consent—you must honor that agreement.
Any breach makes the reduction invalid by law.


🔁 Special Cases: Automatic Capital Reduction

There are situations where the board can reduce capital without shareholder approval or public notice, but only if:

  • 🧾 You’re redeeming shares (Sections 68 or 69), or
  • 🔙 Buying back shares (Section 95), and
  • You would fail the solvency test unless the capital is reduced.

In these cases, the board (with an auditor’s solvency certificate) may resolve to reduce capital just enough to pass the test.


🧾 Must Notify the Registrar

Once you reduce capital, you have 10 working days to inform the Registrar of Companies, specifying:

  • The reduction amount, and
  • The new stated capital.

Failure to notify is a legal offence.


⚠️ Penalties for Non-Compliance

OffencePenalty
Skipping public notice or failing to inform RegistrarCompany: Fine up to Rs. 50,000
Each responsible officer: Fine up to Rs. 50,000

📘 Why It Matters for You

Reducing capital might be part of a smart financial strategy—like restructuring, paying off debts, or optimizing your balance sheet—but do it wrong, and it can cost you. Illegal reductions can:

  • Be reversed by court order,
  • Trigger fines and liabilities, and
  • Jeopardize creditor confidence in your company.

✅ Checklist for Business Owners

✅ Ensure all share issues are backed by accurate valuation (especially for non-cash contributions)
✅ Maintain clear board records of all capital-related decisions
✅ Notify the Registrar within the legal deadline
✅ Get legal/accounting advice when restructuring capital
✅ Honor any agreements made with creditors regarding capital levels


🧩 Need Help?

If you’re planning to:

  • Restructure your capital,
  • Issue shares in return for assets or services,
  • Redeem or buy back shares,
    …make sure you comply with both Section 58 and Section 59.

📝 Want a downloadable capital reduction checklist or board resolution template?
📩 Contact us and we’ll send you a compliant version tailored to your needs

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