Share Cancellation Under the Corporations Act 2001

Running Head: COMPANY LAW
COMPANY LAW
Name of the Student
Name of the University
Author’s Note

COMPANY LAW1
Issue:
The first issue in the case is whether the proposed share cancellation would comply with
the Corporations Act 2001.
The second issue in the case is what the steps to cancel Max’s shares are.
Rules:
According to the Corporation Act 20011, section 203(a) states that the director may resign
from his or her designation at the registered office.
Class A shares are the common shares having full voting rights and the owner of such
shares have an ownership interest in the company. Investors in these shares are given at least one
vote for each share they hold.
Section 254Y of the Corporations Act 2001, it has been stated that the company may buy
back its own shares by registering a Form 484 within a time period not exceeding one month
from the date of cancellation of shares, stating the number of shares, the amount paid by
company in cash or kind, class to which each share belonged. Section 256 further explains that
when a company returns the money paid as capital, back to the member, then it is called capital
reduction. Section 258 states that the company may reduce its capital if such reduction is fair and
reasonable to the shareholders of the company as a whole, does not jeopardize the company’s
fiscal ability to pay its dues to the respective creditors, and is affirmed by the shareholders under
section 256C. However, further in section 588G, it has been discussed that it is a director’s duty
1 "Corporations Act 2001", Legislation.Gov.Au (Webpage, 2019)
<https://www.legislation.gov.au/Details/C2018C00031>.

COMPANY LAW2
to prevent the insolvency of the company while reducing the share capital and that the non-
compliance with section 256 shall lead to criminal liability. The cancellation of share may be a
selective reduction where the reduction of ordinary shares does not apply to each holder
proportionately to the ratio of ordinary shares as held by them and that the terms of reduction
apply differently to each shareholder.
Application:
In the given scenario, there are four Class A ordinary shareholders namely Max, Lucy,
Malcolm and Cassie. However, the company was incorporated by Max and Lucy who hold
500shares at the rate of 1.00 $ each.
Applying the provisions of the Corporation Act 2001, it can be understood Lucy could
have canceled the shares of Max by the method of buy-back of shares by the company. The
proposal of the capital reduction as proposed by Lucy was selective reduction as the proposal
only intended to reduce the capital as poured in by Max and Lucy would be entitled to all the
ownership rights without changing her shareholding status. However applying section 256, the
provisions of the proposal said that Lucy would inject 30,000$ without interest into the company
provided that Max cancels his shares and accept 50,000$ by the company. The decision has been
opposed by Cassie as unethical which can be supported by the provisions of section 256, 258 and
588G of the Corporation Act 2001. The statutory provision states that the capital reduction
should be fair and reasonable so that it does not jeopardize the ability of the company to pay the
dues to its creditor whereas in this scenario, the proposal is jeopardizing the company’s fiscal
position to clear its dues to its creditor. Even though the company has 2000$ in bank, the
outstanding liabilities amount to 5000$ in total. With the buyback of shares, the company would