Explanatory Memorandum
(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce, MP)8 - Miscellaneous
Priority of administrative expenses in voluntary liquidation
8.1 Sections 512 and 516(1) of the Corporations Act both purport to determine the priority of amounts payable in a creditors' voluntary winding up. The relationship between the provisions is currently unclear. Barrett J suggested in McDonald v Deputy Commissioner of Taxation [21] that consideration be given to resolving the conflict between sections 512 and subsection 556(1). His Honour stated: ' I ... note briefly the obvious difficulty in reconciling ss 512 and 556(1) in a case of voluntary winding up. The former professes to identify items payable 'in priority to all other claims', while the latter refers to items that, subject to other provisions of Division 6 of Part 5.6 (which does not include section 512), are to be paid 'in priority to all other unsecured debts and claims'' .
8.2 Subsection 556(1) was inserted in the Corporations Act in 1992 to govern the ranking of debts in a liquidation. It covers voluntary liquidations (see section 513). Accordingly, section 512 is no longer necessary.
8.3 Section 512 of the Corporations Act will be repealed.
8.4 Item 7 will repeal section 512. The priority of administrative expenses in voluntary liquidation is dealt with in subsection 556.
8.5 Item 1 will correct a cross reference in subsection 13(2) of the ASIC Act. Items 2, 4, 9, 10, 12, 13 and 14 will remove references to the obsolete 'official management' procedure in the specified provisions. Item 3 will remove an incorrect cross-reference in the definition of 'administration' in section 9 of the Corporations Act. Item 6 will correct a cross reference to subsection 443BA(2) in section 443D of the Corporations Act. Item 8 will correct a drafting anomaly in section 533 of the Corporations Act. The 'and' at the end of paragraph 533(1)(a) should be 'or'. Item 11 will remove the unnecessary word 'with' from subsection 539(3) of the Corporations Act. Item 15 will remove the obsolete reference to 'examinable officer' in paragraph 597A(1)(b) of the Corporations Act.
Share capital reductions - partly-paid shares
8.6 Section 256B of the Corporations Act provides a general mechanism allowing companies to reduce share capital where a reduction is not otherwise authorised by a specific provision in Part 2J.1 of the Corporations Act.
8.7 A reduction of a company's share capital for consideration can have an adverse impact on creditors, as it effectively reduces the pool of assets over which creditors may make a claim. As such, if a company wishes to use the section 256B process to reduce share capital, paragraph 256B(1)(b) provides that a reduction for consideration may not proceed if it would materially prejudice the company's ability to pay its creditors.
8.8 Flowing from this, where shares are cancelled for no consideration, the company does not have to determine whether the cancellation will materially prejudice the company's ability to pay its creditors. Generally, a cancellation of a share for no consideration will have no effect on the amount of assets over which creditors may make a claim.
8.9 On its face, this provision does not expressly distinguish between fully-paid and partly-paid shares. Where shares are partly-paid shares, their cancellation amounts to the cancellation of a right to claim monies from another party and thereby reduces the pool of assets available to creditors.
8.10 The law is currently interpreted so that the cancellation of a partly-paid share will always involve consideration. Even where no money is payed for the partly-paid shares, the consideration will be provided by the company giving up its right to make a call on the share (and the shareholder receiving the benefit of not having to pay a debt). Following from this interpretation, paragraph 256B(1)(b) will always apply to the cancellation of a partly-paid share. However, there was some discussion of this issue in the context of the James Hardie Inquiry.
8.11 The Bill will amend the section to state expressly that, to avoid doubt, a cancellation of a partly-paid share is taken to be for consideration. The effect of this amendment is to provide express guidance that the share cancellation process described in subsection 256B(1) can only be used to cancel partly-paid shares if the cancellation does not materially prejudice the company's ability to pay its creditors.
8.12 Item 5 of Schedule 5 to the Bill will insert a new subsection 256B(1A) to provide expressly that to avoid doubt, a cancellation of a partly-paid share is taken to be for consideration. The new subsection is intended to add clarification to the current interpretation of the law, and not interrupt the law's current operation. The amendment is strictly prospective.
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