Corporations Act - Australia

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cancellation

      (1) Within 1 month after shares are cancelled, the company must lodge with ASIC a notice in the prescribed form that sets out:

      (a) the number of shares cancelled; and

      (b) any amount paid by the company (in cash or otherwise) on the cancellation of the shares; and

      (c) if the shares are cancelled following a share buy‑back — the amount paid by the company (in cash or otherwise) on the buy‑back; and

      (d) if the company has different classes of shares — the class to which each cancelled share belonged.

      Note: Provisions under which shares are cancelled include section 254J (redeemable preference shares), section 256B (capital reductions),

      subsection 257H(3) (shares a company has bought back), section 258D (forfeited shares), and subsections 258E(2) and (3) (shares returned to a company).

      (2) An offence based on subsection (1) is an offence of strict liability.

      Note: For strict liability, see section 6.1 of the Criminal Code.

      Chapter 2J — Transactions affecting share capital

      Part 2J.1 — Share capital reductions and share buy‑backs

      256A Purpose

      This Part states the rules to be followed by a company for reductions in share capital and for share buy‑backs. The rules are designed to protect the interests of shareholders and creditors by:

      (a) addressing the risk of these transactions leading to the company’s insolvency

      (b) seeking to ensure fairness between the company’s shareholders

      (c) requiring the company to disclose all material information.

      Division 1 — Reductions in share capital not otherwise authorised by law

      256B Company may make reduction not otherwise authorised

      (1) A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction:

      (a) is fair and reasonable to the company’s shareholders as a whole; and

      (b) does not materially prejudice the company’s ability to pay its creditors; and

      (c) is approved by shareholders under section 256C.

      A cancellation of a share for no consideration is a reduction of share capital, but paragraph (b) does not apply to this kind of reduction.

      Note 1: One of the ways in which a company might reduce its share capital is cancelling uncalled capital.

      Note 2: Sections 258A‑258F deal with some of the other situations in which reductions of share capital are authorised. Subsection 254K(2) authorises capital reductions involved in the redemption of redeemable preference shares and subsection 257A(2) authorises reductions involved in share buy‑backs.

      Note 3: For a director’s duty to prevent insolvent trading on reductions of share capital, see section 588G.

      Note 4: For the criminal liability of a person dishonestly involved in a contravention of subsection 256D(1) based on this subsection, see subsection 256D(4). Section 79 defines involved.

      (1A) To avoid doubt, a cancellation of a partly‑paid share is taken to be for consideration.

      (2) The reduction is either an equal reduction or a selective reduction. The reduction is an equal reduction if:

      (a) it relates only to ordinary shares; and

      (b) it applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold; and

      (c) the terms of the reduction are the same for each holder of ordinary shares.

      Otherwise, the reduction is a selective reduction.

      (3) In applying subsection (2), ignore differences in the terms of the reduction that are:

      (a) attributable to the fact that shares have different accrued dividend entitlements; or

      (b) attributable to the fact that shares have different amounts unpaid on them; or

      (c) introduced solely to ensure that each shareholder is left with a whole number of shares.

      256C Shareholder approval

      Ordinary resolution required for equal reduction

      (1) If the reduction is an equal reduction, it must be approved by a resolution passed at a general meeting of the company.

      Special shareholder approval for selective reduction

      (2) If the reduction is a selective reduction, it must be approved by either:

      (a) a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction or whose liability to pay amounts unpaid on shares is to be reduced, or by their associates; or

      (b) a resolution agreed to, at a general meeting, by all ordinary shareholders.

      If the reduction involves the cancellation of shares, the reduction must also be approved by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled.

      (3) The company must lodge with ASIC a copy of any resolution under subsection (2) within 14 days after it is passed. The company must not make the reduction until 14 days after lodgment.

      Note: A proprietary company may also have to notify certain particulars under Part 2C.2.

      Information to accompany the notice of meeting

      (4) The company must include with the notice of the meeting a statement setting out all information known to the company that is material to the decision on how to vote on the resolution. However, the company does not have to disclose information if it would be unreasonable to require the company to do so because the company had previously disclosed the information to its shareholders.

      Documents to be lodged with ASIC

      (5) Before the notice of the meeting is sent to shareholders, the company must lodge with ASIC a copy of:

      (a) the notice of the meeting; and

      (b) any document relating to the reduction that will accompany the notice of the meeting sent to shareholders.

      256D Consequences of failing to comply with section 256B

      (1) The company must not make the reduction unless it complies with subsection 256B(1).

      (2) If the company contravenes subsection (1):

      (a) the contravention does not affect the validity of the reduction or of any contract or transaction connected with it; and

      (b) the company is not guilty of an offence.

      (3) Any person who is involved in a company’s contravention of subsection (1) contravenes this subsection.

      Note 1: Subsection (3) is a civil penalty provision (see section 1317E).

      Note 2: Section 79 defines involved.

      (4) A person commits an offence if they are involved in a company’s contravention of subsection (1) and the involvement is dishonest.

      256E Signposts to other relevant provisions

      The following table lists other provisions of this Act that are relevant to reductions in share capital.

      Other

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