THE CORPORATIONS LAW

CHAPTER 2J - TRANSACTIONS AFFECTING SHARE CAPITAL

PART 2J.1 - SHARE CAPITAL REDUCTIONS AND SHARE BUY-BACKS

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

SECTION 256B   COMPANY MAY MAKE REDUCTION NOT OTHERWISE AUTHORISED  

256B(1)  (Reductions not otherwise authorised)  

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.

256B(2)  (Equal or selective reduction)  

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)  [Certain differences ignored]  

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.