Reduction in share capital

See also:

Shares

Share buy-backs

Cancellation of shares: Reference guide

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

This information sheet (INFO 56)covers provisions set out in Division 1 of Part 2J.1 of the Corporations Act 2001 (the Corporations Act) and does NOT cover a reduction in share capital achieved through:
  • redemption of redeemable preference shares (s254J-254K)

  • share buy-backs (s257A)

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

What is a reduction of capital?

Section 256B(1) of the Corporations Act provides that 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.

An equal or selective reduction

The reduction is either:

  • an equal reduction, or

  • a selective reduction.

An equal reduction must meet these three conditions:

  • 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 do not apply, it must be a selective reduction.

Equal reduction procedure

Step 1

Lodge a Form 2560 Notification of reduction in share capital details with us and attach:

  • notice of the meeting at which it is proposed to pass the resolution to reduce the share capital

  • any document relating to the reduction that will accompany the notice of the meeting sent to members.

Lodging period:

Public listed company – Before the notice of meeting is sent to the members and no less than 29 days before meeting.

Any other company – Before the notice of meeting is sent to the members and no less than 22 days before meeting.

Step 2

Send notice of meeting and any accompanying documents to members.

Step 3

Hold a general meeting to pass the resolution. This may be an ordinary resolution passed by a simple majority unless the company's own constitution requires a special resolution in these circumstances.

Step 4

Reduce the share capital.

Step 5

Lodge a Change to company details within 28 days after reducing the share capital to advise 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.

Selective reduction procedure

Step 1

Lodge a Form 2560 Notification of reduction in share capital details and attach:

  • notice of the meeting at which it is proposed to pass the resolution to reduce the share capital

  • any document relating to the reduction that will accompany the notice of the meeting sent to members.

Lodging period:

Public listed company – Before the notice of meeting is sent to the members and no less than 29 days before meeting.

Any other company – Before the notice of meeting is sent to the members and no less than 22 days before meeting.

Step 2

Send notice of meeting and any accompanying documents to members.

Step 3

Hold a general meeting. 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 involves 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 .

Step 4

Within 14 days after the passing of the resolution the company must lodge a Form 2205 Notification of resolutions regarding shares.

Step 5

14 days after lodging the Form 2205, reduce the share capital.

Step 6

Lodge a Change to company details within 28 days after reducing the share capital to advise 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.

Special conditions for single member companies

A single member company does not need to issue a notice of meeting or hold a meeting to pass a resolution. A company that has only one member may pass a resolution by the member recording it and signing the record. In this situation, the company is not required to lodge any documents with us relating to the share capital reduction before the resolution is passed.

For a selective reduction in capital only, once the resolution is passed by the single member, the company is required to lodge a 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. Passage of the resolution must also be recorded in the company's minute book . The company is required to lodge a Form 484 within 28 days after reducing the share capital to advise 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.

This is Information Sheet 56 (INFO 56), reissued in January 2014. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.

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Last updated: 19/08/2013 12:00