What is the Reduction of Share capital of a Company?

A reduction of share capital of a company is when any money paid to a company in respect of a member's share is returned to the member.

Here we are going to set out the provisions covered in Division 1 of Part 2J.1 of the Corporations Act 2001.This write up does not cover a reduction in share capital by:

·         redemption of redeemable preference shares (s254J-254K)

·         share buy-backs (s257A)

·         other prescribed share capital reductions – e.g. cancellation of forfeited shares (s258A-258F)

As per Section 256B(1) of the Corporations Act a company may reduce its share capital in a way that is not otherwise authorised by the Corporations Act if the reduction:

(a) is fair and reasonable to the company's members as a whole; and

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

(c) is approved by members under s256C.

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.

The reduction of share capital can be either:

·         an equal reduction, or

·         a selective reduction.

The following three conditions apply to an equal reduction:

·         It relates only to ordinary shares.

·         It applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold.

·         The terms of the reduction are the same for each holder of ordinary shares.

If any of these three conditions are not met, it must be a selective reduction.

To carry out an equal reduction of share capital the company must lodge Form 2560 Notification of reduction in share capitaldetails with ASIC and attach with it a notice of the meeting in which it proposes to pass the resolution for reduction in share capital and also attach any document relating to the reduction which will accompany the notice of meeting to be sent to members. The notice of the meeting must be sent to the members no less than 29 days before the meeting for a Public company and no less than 22 days before the meeting for any other type of company.

The company members will hold a general meeting to pass an ordinary resolutionby a simple majority to this effect unless the company’s constitution requires a special resolution to be passed. The share capital reduction will now take place and the company will need to lodge Form 484 Change to company details with ASIC within 28 days of the reduction of share capital. This is to advise ASIC of

• any changes to the company's share structure table; and

·         For proprietary companies only – any changes to the details of the shares held by the top 20 members of any affected share class.

The procedure for a Selective reduction also involves lodging Form 2560 Notification of Reduction of Share Capital with ASIC, along with the notice of the meeting andall the documents which have been sent to the members with the notice of the meeting to pass the resolution to reduce the share capital. The time period by which the notice needs to be sent is no less than 29 days before the meeting for a public company and no less than 22 days for any other company.At the general meeting the reduction must be approved by either:

·         a special resolution 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

·         a resolution agreed to by all ordinary members.

If the reduction leads to the cancellation of shares the reduction must also be approved by a special resolution passed at a separate meeting of the members whose shares are to be cancelled .The company must lodge Form 2205 Notification of resolution regarding shares with ASIC within 14 days of passing the resolution and reduce the share capital 14 days after lodging the form. The company will need to lodge Form 484 Change to company details with ASIC within 28 days of reducingthe share capital. This is to advise ASIC of

• any changes to the company's share structure table; and

·         For proprietary companies only – any changes to the details of the shares held by the top 20 members of any affected share class.

There are some special conditions that apply for reducing the share capital for single member companies. A single member company does not need to hold a meeting to pass the resolution for reducing the share capital. The member simply needs to pass the resolution by recording it and signing the record.

For a single member company having a selective reduction of share capital once the single member passes the resolution the company is required to lodge Form 2205. The text of the resolution as passed can be set out on the form or a copy of the resolution signed by the single member attached as an annexure to the form. The passing of the resolution must also be recorded in the company minutes book.The company must lodge Form 484 within 28 days of the reduction of share capital to advise ASIC of:

·         any changes to the company's share structure; and

·         for proprietary companies only – any changes to the details of the shares held by the member of any affected share class.