Question

The directors of BrickBeats Pry Ltd are considering the reduction of the company's share capital. Give at least three commercial reasons why companies may wish to reduce their share capital and explain the requirements that must be met under the Corporations Act 2001 (Cth) to reduce such share capital

Answer 1

The reduction of share capital means reduction of issued, subscribed and paid up share capital of the company. Buyback of share and redemption of preference shares are also reduction of share capital.

Commercial reasons why companies may wish to reduce their share capital

• To return surplus capital to share holders
• To simplify capital structure
• To eliminating losses, which may be preventing the payment of dividends

Requirement to reduce share capital under Corporation Act 2001

A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction :

1. is fair and reasonable to the compnay's shareholders as a whole; and
2. does not materially prejudice the company's ability to pay its creditors; and
3. is approved by shareholders under section 256C.