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Transactions affecting share capital a variations is

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TRANSACTIONS AFFECTING SHARE CAPITAL A. Variations IS examinable in Corporations Law B. Maintenance of Share Capital Doctrine General Rule: Limited liability companies must maintain their issued share capital except in the legitimate course of business {Trevor v Whitworth} In {Trevor v Whitworth} the House of Lords held that a limited liability company could not purchase its own shares as that was equivalent to returning share capital to shareholders ahead of creditors The doctrine has now been incorporated into and substantially modified by {Chapter 2J Corporations Act} o The modern rules introduced in 1998, give more flexibility – however according to {s 256A Corporations Act } the purpose of the provisions is still to protect the interests of shareholders and creditors Note that a director could be in breach of their director’s duties even if they still comply with provision permitting a reduction in share capital B1. Reduction of Share Capital A company may wish to reduce its share capital for a range of commercially legitimate reasons o May wish to scale down the size of its business o To give existing shareholder increased control within the company {Winpar Holdings Ltd} Potential risks to creditors with such transactions (at least where company is insolvent) or where company is rendered insolvent by transaction. Difficulties created for shareholders if the terms by which capital is returned discriminates between shareholders The objectives of these provisions are defined in {s 256A Corporations Act} In terms of reduction of share capital, these objectives are primarily implemented by requirements of {s 256B Corporations Act}: B.1 ‘Fair and reasonable’ {s 25B6(1)(a)} The terms ‘fair and reasonable’ are not defined but the paragraph would allow a challenge to a reduction that discriminates among shareholders or if the terms of the reduction are inadequate (unfair price) Fairness (generally) {Explanatory Memorandum to the Company Law Review Bill 1998} states that ‘fairness’ is meant to mean: o Fairness to the shareholder group not individuals o Should also be a fair price {Winpar} Note that courts seem reluctant to determine if it’s a fair price particular if you pay premium to market value 2
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o Also consider if the terms deny rights to any shareholders Fairness between Shareholders ‘fair and reasonable’ must also be between shareholders (particularly should not disadvantage preference shareholders) {Re Fowlers} B.2 ‘Does not materially prejudice creditors’ {s 256B(1)(b)} Addresses the possible impact a reduction of capital can have on creditors However its only where there is ‘material prejudice’ to the company’s ability to pay creditors that the transaction will be disallowed { Explanatory Memordandum to the Company Law Review Bill 1998} states that ‘whether prejudice is ‘material’ will be a question of judgement to be determined in light of all relevant circumstances, including the particular characteristics of the company and the situation of the company’s creditors” This suggests the court must look at the creditors as a whole when determining the effect of the transaction
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TRANSACTIONS AFFECTING SHARE CAPITAL A Variations IS...

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