Company may make reduction not otherwise authorised
256B Company may make reduction not otherwise authorised
A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction:
is fair and reasonable to the company’s shareholders as a whole; and
does not materially prejudice the company’s ability to pay its creditors; and
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.
One of the ways in which a company might reduce its share capital is cancelling uncalled capital.
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.
For a director’s duty to prevent insolvent trading on reductions of share capital, see section 588G.
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.
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).
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:
it relates only to ordinary shares; and
it applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold; and
the terms of the reduction are the same for each holder of ordinary shares.
Otherwise, the reduction is a selective reduction.
In applying subsection (2), ignore differences in the terms of the reduction that are:
attributable to the fact that shares have different accrued dividend entitlements; or
attributable to the fact that shares have different amounts unpaid on them; or
introduced solely to ensure that each shareholder is left with a whole number of shares.
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