Writing off lost capital is one of the ways in which the share capital can be :

Question

Accepted Answer

The correct option is 2:
When a company has incurred heavy losses and its balance sheet shows a debit balance in the Profit & Loss Account, the existing paid-up share capital is no longer represented by realizable assets. In this situation, the legal process of 'Writing off lost capital' is carried out as a key step under the wider process of \*\*Reduction of Share Capital\*\*. Reduction of Share Capital, as governed by the Companies Act, is the formal procedure, requiring a special resolution and the approval of the National Company Law Tribunal (NCLT), to legally cancel any paid-up capital that has been lost or is unrepresented by available assets. The main objective is to present a true and fair view of the company’s financial position by bringing the nominal value of shares down to its real value, thereby paving the way for future dividend declarations.

The incorrect option is 1:
The term 'Altered' or \*\*Alteration of Share Capital\*\* refers to modifying the *authorized* capital of the company. Alteration typically involves activities like increasing the authorized share capital, consolidating existing shares into larger denominations, sub-dividing shares into smaller denominations, or converting fully paid shares into stock. While alteration is a legal change to the capital structure, it fundamentally differs from 'reduction' because it does not involve canceling or refunding *paid-up* capital to wipe out accumulated losses. Alteration is a less stringent process, usually requiring only an ordinary resolution, whereas reduction requires court sanction to protect creditor interests.

The incorrect option is 3:
\*\*Converted into reserve capital\*\* is an entirely different concept that deals with the *uncalled* portion of the share capital. This occurs when a company resolves by special resolution that a specified portion of its uncalled share capital shall not be called up, except in the event and for the purpose of the company being wound up. Therefore, it is a restriction placed on *uncalled* capital for the security of creditors upon liquidation. Writing off lost capital, conversely, is a procedure specifically for eliminating accumulated losses against the company's *paid-up* capital.

The incorrect option is 4:
Since the legal and accounting procedure described in the question—writing off lost capital—is precisely one of the methods used under \*\*Reduction of Share Capital\*\*, stating that none of the options apply is factually incorrect. Therefore, Option 4 is not the correct choice.