CORPORATIONS ACT 2001
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 5: A company may reduce its share capital for the purposes of the conversion and write-off provisions determined by APRA despite this Division (see Subdivision B of Division 1A of Part II of the Banking Act 1959 , Division 2 of Part IIIA of the Insurance Act 1973 and Division 1A of Part 10A of the Life Insurance Act 1995 ).
[ CCH Note: Act No 180 of 2012, s 3, Sch 7 contained the following application provision (which was effective 11 December 2012):
Application of amendments made by this Act
The amendments made by this Act apply in relation to an act or omission by a body corporate occurring on or after the day this Act commences.
To avoid doubt, a cancellation of a partly-paid share is taken to be for consideration.
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 .256B(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.