Meaning and Legal Basis
Reserve Capital refers to that portion of a company’s uncalled share capital which is reserved to be called up only in the event of winding up of the company. It is governed by Section 65 of the Companies Act, 2013, which allows a company limited by shares, by passing a special resolution, to determine that a certain part of its uncalled share capital shall not be capable of being called up except during winding up. The primary objective of reserve capital is to provide additional security to creditors, as it ensures that certain funds remain untouched during the company’s normal operations. Unlike share capital, reserve capital cannot be demanded by the company while it is a going concern. This concept strengthens financial discipline and credibility, especially in companies dealing with large-scale public funds.
Nature and Characteristics
Reserve capital has a distinctive legal nature that separates it from ordinary share capital. It cannot be created automatically; instead, it requires an express decision of shareholders through a special resolution as mandated under Section 65. Once created, reserve capital becomes a form of contingent capital that comes into existence only upon winding up. It cannot be reduced, altered, or utilized for business purposes during the company’s lifetime. This feature protects creditors by ensuring that a portion of capital remains intact until liquidation. Importantly, reserve capital is optional, not mandatory, and is mostly adopted by companies that wish to demonstrate higher financial responsibility and long-term stability.
Difference from Other Capital Concepts
Reserve capital is often confused with capital reserve or reserve funds, but legally they are different. Capital reserve arises from capital profits and is governed by accounting principles, whereas reserve capital arises from uncalled share capital under Section 65 of the Companies Act, 2013. Reserve capital is not shown as an available asset and cannot be used to pay dividends or meet operational expenses. Its purpose is strictly limited to winding up proceedings. This clear legal distinction helps courts and stakeholders understand that reserve capital is meant solely for creditor protection and not for routine financial management.
Real-Time Example
Consider a public limited company engaged in infrastructure development that has issued shares with a face value of ₹100, out of which only ₹70 is called up. The company, anticipating long-term liabilities, passes a special resolution declaring ₹20 of the uncalled ₹30 as reserve capital. Years later, if the company faces liquidation due to insolvency, the liquidator can call up this ₹20 per share to settle creditor claims. Until winding up, shareholders cannot be asked to pay this amount. This real-time scenario shows how reserve capital acts as a financial safeguard exclusively during winding up.
Mnemonic to Remember Reserve Capital
A simple mnemonic to remember Reserve Capital is “RWU” – Reserved for Winding Up.
- R – Reserved portion of uncalled capital
- W – Withdrawn only during winding up
- U – Under Section 65
This mnemonic helps students recall that reserve capital is not usable in daily operations and becomes relevant only at the final stage of a company’s existence. Using such memory tools makes it easier to structure answers in exams and ensures accuracy in citing legal provisions.
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