classes of shares topic 4: share capital, membership

MLL221 | Corporate Law Topic 4: Share Capital, Membership and Dividends

S.P.Brown | 212175898 pg. 27

Topic 4: Share Capital, Membership & Dividends

SHARE CAPITAL Nature of Shares

• 1070A Corporations Act: o “A share ...: o is personal property; and o is transferable or transmissible as provided by:

(i) the company’s ... Constitution; or (ii) the operating rules of a [Clearing & Settlement

Facility]; and o is capable of devolution by will or by operation of law.

• Distribution rights o receive dividends o repayment of principal and surplus assets of company on

winding up • Control rights

o voting rights

Pilmer v Duke Group [2001] HC o “Once issued, a share comprises a collection of rights and

obligations relating to an interest in a company of an economic and proprietary character, but not constituting a debt”

Defined in terms of rights and liabilities that stem from ownership of share

Property of shareholder: o Item of intangible property known as a “chose in action: o Can be dealt with in the same way as other property (i.e. sold,

mortgaged, will) o S 1070A Corporations Act defining legislation

A claim against the company for the rights set out in the Corporations Act and constitution are:

o Distribution Rights Dividends Surplus assets on winding up

o Control rights Voting

Classes of shares What are classes of shares?

o Companies can issue shares of different types that have different rights attached to each type of share

o S124(1)(a) – gives power of company to issue shares o S254B(1) – gives power to issue different ‘classes’ of shares:

“A company may determine: a) the terms on which its shares are issued; and b) the rights and restrictions attaching to the shares”

How do classes differ? o Entitlement to dividends o Priority in payment of dividends o Voting rights o Priority in payment of capital on winding up o Right to participate in distribution of surplus assets on

winding up Where are class rights set out?

o Constitution o Share issue contract o Application for registration of company details classes of

shares of initial members o ASIC must be notified of any division of shares into classes:

s246F(1) Why issue different classes?

o To concentrate control of the company in the hands of certain shareholders

Particularly founding shareholders of small family companies

Companies often have voting shares and non-voting shares – most often ‘ owners’ have voting shares as a class of share

o To issue shares that have the characteristics of debt Achieved by issuing shares with a stated rate of

dividend but with limited voting rights (preference shares)

o Tax minimsation schemes

1. Ordinary shares most common dividend before deferred shareholder but after preferred

shareholders full voting rights


S.P.Brown | 212175898 pg. 28

2. Preference shares

preference to dividend ahead of ordinary shareholder Rights must be specified in accordance with s.254A(2) which

provides that the company’s constitution or special resolution must specify rights attached to the preference shares with respect to:

o Repayment of capital o Participation in surplus assets and profits o Cumulative and non-cumulative dividends o Voting; and o Priority of payment of capital and dividends

o Non-cumulative preference shareholders:

o only entitled to share of declared dividend for that particular year

o They lose the entitlement (entitled means will receive at later date) to any dividend that is not declared in the relevant year

o Cumulative preference shareholders:

o entitlement to dividend accumulates from year to year whether or not dividend has been declared. Undeclared dividend are effectively carried forward and added to future year entitlement

Voting rights generally confined to specific situations, e.g.:

o Reduction in capital o winding up of Co o variation of class rights

3. Redeemable preference shares

S.254A(3) shares that are liable to be redeemed: o Fixed time or event o Company’s option; or o Shareholder’s option

Why use? o Co can react to change in market by buying

back shares entitled to a high percentage of dividend

Redemption must be paid out of profits otherwise available for dividend or proceeds of a fresh issue made for purpose of the redemption (s.254K)

4. Governor’s Shares Small proprietary companies will often issue governor's

shares to the company founder/governing director. These shares will usually enjoy special voting rights, enabling

that shareholder to control the company.

5. Employee Shares Some companies' constitutions provide for the issuing of

shares to employees - Employee Share Option Plans (ESOPS) Generally confer limited rights so too much control not

conceded to employees Variation of Class Rights

Corporations Act sets out procedure to varying class rights Common law: variation that alters the substance, as opposed to the

mere enjoyment of a class right Corporation Act: deemed variation If company does not follow procedure – members can be bring a case

against company

1. Common Law: Alteration must affect substance Only variations that affect the substance of the class right, as

opposed to the mere enjoyment or value of the right, need to comply with the class right variation procedure

Case: White v Bristol Aeroplane Co Ltd [1953] Bonus issue of shares to ordinary shareholders had the effect

of diluting the voting rights of preference shareholders Held not to effect the substance of the preference

shareholders rights They still had their voting rights (substance the same) Only their enjoyment of their voting power that was affected

by the share issue

Case: Greenhalgh v Arderne Cinemas Ltd Sufficient shares were issued to Mr. Greenhalgh to enable him

to block a special resolution Members by ordinary resolution voted to sub-divide their

shares, thereby increasing the number of votes they had


S.P.Brown | 212175898 pg. 29

o Effect was to diminish the proportion of shares Mr Greenhalgh had and meant he could not block a special resolution

So even though Mr Greenhalgh’s overall voting power has suffered, the shares he held still held the same rights and the issue was held not to be a variation of class rights

2. Corporations Act: Deemed Variation s246C S246C sets out the situations that the law regards as

variations of class rights:

o Company with share capital & shares in a class are divided into further classes & not all the rights are the same

Division deemed to vary rights attached to every share in the class existing before the division: s246C(1)(a)

o Rights attached to some of the shares in a class are varied

Variation deemed to vary the rights attached to every other share that was in the class before the variation: s246C(2)(a)

o Company without share capital & members in a class are divided into further classes and all the rights are not the same

Deemed to vary the rights of every member in the class existing before the division: s246C(3)(a)

o Rights of some of the members in a class are varied Deemed variation varies the rights of

every other member who was in the class before the variation: s246C(4)(a)

o Company with one class of shares and new shares are issued:

Vary the rights of the shares already issued if the right is attaching the new shares are not the same AND those shares are not provided for in the Constitution/ASIC lodgment: s246C(5)

o Preference shares and new preference shares are issued that rank equally with pre-existing preference shares

Vary the rights of the existing shares UNLESS the issue is authorized by the terms of the issue of the existing shares OR the companies constitution was in force when existing shares issued: s246C(6)

3. Procedure to vary and Cancel Class Rights If constitution sets out procedure

o Procedure in the constitution must be followed to vary or cancel class rights: s246B(1)

No constitution or constitution doesn’t set out procedure o May only vary or cancel class rights:

By special resolution of the company AND By special resolution passed at a meeting

of the holders of the affected class OR With the written consent of members with

at least 75% of the votes of the affected class

S246B(2)


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4. Challenging a Variation of Class Rights

Section 246D(1) o Members with at least 10% of votes in affected class o Apply to court (within one month) to have variation

set aside

o Test: Does the variation unfairly prejudice the members of the affected class? Section 246D(5)

5. Other Remedies If company fails to follow variation procedure in constitution

o Breach of the s140(1)(a) statutory contract If company fails to follow s246B procedure

o Affected members can apply for an injunction: s1324

If variation is oppressive or unfair o Remedy under s232

Share Capital

1. Definition Share capital is the total amount of money (or other

property) that investors provide to the company in consideration for the shares issues to them

There is an obligation on companies to maintain their share capital (i.e. not return capital to members)

2. Maintenance of Share Capital: the Common Law rule in Trevor

To protect creditors o A company is generally prohibited from reducing its

share capital because a reduction would prejudice the rights of creditors

o Reduction in share capital prejudices creditors by diminishing the pool of funds available to the company to pay its debts

Case: Trevor v Whitworth (1887) “Paid up capital may be diminished or lost in the course of the

company’s trading; that is a result which no legislation can prevent; but persons who deal with and give credit to a limited company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid, as well as upon the responsibility of its members for the capital remaining at call; and they are entitled to assume that no part of the capitals which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business”

3. Maintenance of Share Capital: Modern Statutory Rules

Corporations Act o The rule that companies must maintain their share

capital is expressed in the Corporations Act in the following rules:

Restrictions on a company purchasing its own shares: Part 2J.2

Restrictions on a company giving financial assistance to a person acquire shares in the company: Part 2J.3

The Corporations Act permits a company to reduce its share capital in limited circumstances:

o Permitted share capital reductions: s256B o Permitted share buy backs: s275A o Permitted financial assistance: s260A

246D Variation, cancellation or modification without unanimous support of class (1) If members in a class do not all agree (whether by resolution or written consent) to: (a) a variation or cancellation of their rights; or (b) a modification of the company’s constitution (if any) to allow their rights to be varied or cancelled; members with at least 10% of the votes in the class may apply to the Court to have the variation, cancellation or modification set aside. (2) An application may only be made within 1 month after the variation, cancellation or modification is made. (3) The variation, cancellation or modification takes effect: (a) if no application is made to the Court to have it set aside—1 month after the variation, cancellation or modification is made; or (b) if an application is made to the Court to have it set aside—when the application is withdrawn or finally determined. (4) The members of the class who want to have the variation, cancellation or modification set aside may appoint 1 or more of themselves to make the application on their behalf. The appointment must be in writing. (5) The Court may set aside the variation, cancellation or modification if it is satisfied that it would unfairly prejudice the applicants. However, the Court must confirm the variation, cancellation or modification if the Court is not satisfied of unfair prejudice. (6) Within 14 days after the Court makes an order, the company must lodge a copy of it with ASIC. (7) An offence based on subsection (6) is an offence of strict liability.


S.P.Brown | 212175898 pg. 31

4. Permitted Share Capital Reductions: s256B Under section 256B(1), a company may reduce its share capital if

the reduction: o Is fair and reasonable to the company’s

shareholders as a whole; and o Does not materially prejudice the company’s

liability to pay its creditors; and o Is approved by shareholders under s256C

Note, the shareholder approval requirements may vary depending on whether the reduction is an equal reduction or a selective reduction

A company must not reduce its share capital unless it complies with the requirements set out in s256B(1): s256D

A. Fair and Reasonable to Shareholders as a Whole

Factors o Adequacy of consideration paid to shareholders o Whether reduction would have practical effect of

depriving some shareholders of their rights Example: stripping a company of funds

that would otherwise be available or distribution to preference shareholders

o Whether a reduction used to effect a takeover and avoid takeover provisions

o Whether reduction involved in arrangement that should more properly proceed as a scheme of arrangement

Injunction o Shareholder who alleges that a reduction of capital is not

fair and reasonable may apply for a s1324 injunction o Company not the shareholder, has the onus of proving

the reduction is fair and reasonable: s1324(1B) o Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000):

can reduce share capital as long as it doesn’t prejudice the company paying its creditors

B. Ability to Pay Creditors

Injunction: o Creditors may apply for an injunction to prevent a

reduction of capital if the company’s solvency is an element of a contravention of s256B(1)(b): s1324(1A)

o Company has the onus of proving the reduction does not prejudice its ability to pay creditors: s1325(1B)

ASIC Disclosure o S256C(5) requires company to lodge details of proposed

capital reduction with ASIC to assist creditors in discovering details of the proposed capital reduction

C. Shareholder approval: Is reduction equal or selective? Section 256C shareholder approval requirements vary depending

on whether reduction is: o Equal reduction o Selective Reduction

More onerous approval requirements because potential to be unfair

Equal Reduction: s256B(2) o Equal Reduction if:

Relates only to ordinary shares Applies to each shareholder in proportion

to number of ordinary shares held Reduction terms same for each ordinary

shareholder See s256B(3) for difference in that may be

ignored in defining ‘equal’ reduction If not equal reduction, then capital reduction is selective

reduction

What vote is required? Equal Reduction

o Approved by ordinary resolution at general meeting: s256C(1)

Selective Reduction o Approved by:

Special Resolution at general meeting - With no votes cast in

favour by person (or associate) to receive consideration as part of reduction or whose liability o pay amounts unpaid on shares is to be reduced


S.P.Brown | 212175898 pg. 32

OR unanimous resolution at general meeting PLUS if reduction involves cancellation of

shares: - Reduction must also be

approved by special resolution of members whose share are to be cancelled

Notice Requirements Notice of meeting must include statement setting out all known

information that is material to the decision on how to vote on the resolution to approve the capital reduction: s256C(4)

Before notice of meeting is sent, company must lodge notice and material information statement with ASIC: s256C(5)

Purpose is to give shareholders and creditors advance notice of reductions so they may oppose

Case: Winpar Holding Ltd v Goldfields Kalgoorlie Ltd (2000)

Facts: GKL called shareholders’ meeting to approve selective capital

reduction: o Minority shares (including WHL) to be cancelled,

giving GS 100% ownership o Consideration 55 cents per share o 8 cents higher than fair & reasonable price

determined by independent expert WHL argued the capital reduction was not fair & reasonable

because it gave GS a ‘special benefit’: o Reduction in head office costs o Other synergy benefits/savings

WHL argued the value of this special benefit should have been allocated entirely to the minority shareholders

Held: What is fair and reasonable?

o Capital reduction was fair and reasonable to the company’s shareholders as a whole because it gave benefits to both the majority and minority shareholders that they otherwise would not have received

o Majority obtained benefit from 100% ownership but minority also obtained enhanced share price (8 cents above value)

o The words ‘as a whole’ “require fairness and reasonableness as between majority and minority, not some one-sided allocation...”

o Also, the selective capital reduction was fair and reasonable, notwithstanding that QBE as a single shareholder could determine the outcome of the vote

s.256B is a comprehensive, protective code so the Gambotto principles of general law are not applicable in this context

Permitted Share Buy Backs: s257A

When company buys back its shares from a shareholder the company is reducing its share capital

Common Law o Common law prohibits a company from buying back its

shares from shareholders as part of the rules aimed at maintaining share capital: Trevor v Whitworth

Corporations Act o Corporations Act prohibits a company acquiring shares in

itself or issuing or transferring shares to an entity it controls (ss.259A & 2259C)

o Exception: Share buy backs under s.275A

1. Section 257A

Company may buy back its own shares if: o Buy back does not materially prejudice creditors o Company follows procedure in Division 2 of Part

2J.1 The 10/12 limit

o Generally, companies may buy back up to 10% of their shares within a 12 month period without shareholder approval and with minimum procedural requirements

2. Permitted Buy Back Schemes

On-market buy backs o Conducted by listed company on ASX o Company offers to buy shares ‘on the market’ o Members have equal opportunity to participate o Member approval only required if over the 10/12

limit Equal access buy backs


S.P.Brown | 212175898 pg. 33

Selective buy backs Employee share scheme buy backs Minimum holding buy backs

Permitted Financial Assistance: s260A

Section 260A o Company may financially assist person to acquire shares in

the company (or holding company) only if: No material prejudice to:

- Company or shareholders; or

- Creditors; or o Shareholders approve assistance under s.260B; or o Assistance is exempted under s.260C

What is financial assistance? o Not defined o Common examples:

Company lending money to person to be used to acquire shares in company

Company guaranteeing person’s loan where loan used to acquire shares in company

Company providing its assets as security for person’s loan where loan used to acquire shares in company

o May be: Direct or Indirect Given before or after the acquisition of shares:

s260A(2) Rationale lies in maintenance of capital theory:

o If company’s assets used to finance purchase of own shares, failure to repay finance results in reduction in company’s capital

o If borrower defaults on loan, company will call on security including its own shares to repay the loan

Note – prohibition against giving financial assistance severely undermined by s.260A

A. No Material Prejudice Elements not cumulative

o “or” o Only need to consider if: o No shareholder approval obtained; and o No exemptions under s.260C to financial assistance

prohibition apply o See ASIC v Adler for discussion and example of

‘material prejudice’

Case: ASIC v Adler [2002] Facts:

A requested W and F to arrange HIHC to advance $10m to PEE (Adler controlled company)

Trust set up with PEE as trustee o $10m units issued to HIHC (amount of loan) o Units also issued to Adler controlled company

PEE used $4m of loan to purchase HIH shares o Why? Trying to inflate HIH share price to support

Adler’s own substantial shareholding o Williams was aware of this

PEE sold HIH shares at $2m loss Loan funds also used:

o to purchase shares in unlisted tech company (controlled by Adler)

o After tech crash, suffered further loss

Section 260A: Financial Assistance by a Company for Acquiring Shares in the Company or a Holding Company (1) A company may financially assist a person to acquire shares (or units of shares) in the company or a holding company of the company only if: (a) giving the assistance does not materially prejudice: (i) the interests of the company or its shareholders; or (ii) the company’s ability to pay its creditors; or (b) the assistance is approved by shareholders under section 260B (that section also requires advance notice to ASIC); or (c) the assistance is exempted under section 260C.


S.P.Brown | 212175898 pg. 34

o make further unsecured loans to companies associated with Adler

o not directly relevant to financial assistance issue Section 260A:

ASIC Case o ASIC prosecuted A, W and F (and others) for being

‘involved’ in breach of s.260A o HIHC contravened s.260A by providing financial

assistance to PEE to acquire shares in HIHC holding company, HIH

Issue o Did the financial assistance materially prejudice the

interests of the company or shareholders or credits? o Adler:

No material prejudice because of the rights HIHC acquired through the transaction

Held: s.260A contravened because HIHC suffered material

prejudice o And assistance not approved or exempt

Any rights acquired by HIHC where materially lower in value than the $10m loan

A, W and F sufficiently ‘involved’ in contravention to breach s.260D(2)

Onus is on defendant to demonstrate no material prejudice Assess material prejudice by looking at:

o Transaction Lack of safeguards Unfavourable terms

o Financial consequences Loss was inherently likely

B. OR Shareholder Approval

Section 260B o Company may financially assist a person to acquire

shares in the company (or holding company) if assistance approved by shareholders under s.260B

o Notice of meeting must include statement of all information material to the decision on how to vote: s.260B(4)

What vote is required? o Shareholder approval must be given by:

Special resolution at general meeting

- Person acquiring shares (& associates) may not vote in favour

OR Unanimous resolution at general meeting

PLUS o If company giving financial assistance becomes

subsidiary of holding company: financial assistance must also be approved

by special resolution of holding company: s.260B(2) & (3)

C. OR Financial Assistance Exemptions

Exemptions o s.260A does not apply if one of the exemptions listed

in s.260C are operative o Section 260C examples

Exemption for certain payment arrangements for partly paid shares made in the ordinary course of commercial dealings

Exemption for financial assistance provided by financial institutions in the ordinary course of business

Exemption for financial assistance given as part of an employee share scheme approved by shareholders

D. Consequence for Breaching s260A

Persons ‘involved’ o Any person ‘involved’ in contravention of s.260A

contravenes s.260D(2) o Person need only be aware of acts that affect the

breach No requirement to know they constitute

an offence o ASIC v Adler:

Test is objective Fodera didn’t have actual knowledge – but

the combination of suspicious circumstances and failure to make inquiry meant knowledge could be inferred

Consequences o s.260A is a civil penalty provision


S.P.Brown | 212175898 pg. 35

o If breach is ‘dishonest’, contravention may constitute criminal breach

o Breach doesn’t affect validity of the financial assistance or connected contract: s.260D(1)(a)

o Company not guilty of an offence: s.260D(1)(b)

MEMBERSHIP

Significance of being a member

Rights and Duties owed to members o Vote at general meetings o Dividends o Liable to pay calls: s254M(1) o Liable to contribute to debts when being wound up:

s514 o Share in surplus assets on winding up

Evidence of Shareholding

Share certificate is only prima facie evidence of the member’s title to the share: s.1070C(2)

The registration of the member’s holding in the register of members confers the status of shareholder

CHESS o Clearing House Electronic Sub-register System o Operated by ASX for listed companies o Enables shares in companies to be held in

uncertified mode (no certificate) Must maintain s168

o Register of Members Location s172 Information about shareholders and their shares:

s169

1. Can the Register be Inspected? Public’s right to know identity

o S173(1) o Anyone can inspect o Shareholders can inspect for free

Shareholder’s right to privacy o S177 o Can’t put names on mailing list o Can’t use for ‘improper purposes’

Unless relevant to shareholder rights or approved by company

2. Significance of the Register

Proof of matters shown in it o s.176

Person does not become a member until name is entered o Maddocks v DJE Constructions Pty Ltd

Only persons registered gain Corporations Act membership rights

Aggrieved persons can apply to have register corrected o s.175

3. Share Certificates

A share certificate is prima facie evidence of the title of a shareholder to the number of shares specified

o s.1070C(2) Must state:

o the name of the company and its jurisdiction of registration;

o the class of shares; and o the amount unpaid on the shares.

Case: Re Bahia and San Francisco Rail Co (1868) LR 3 QB 584B

Relied on a share certificate that stated A was the owner of a certain number of shares and purchased those shares from him.

After B became registered as the holder, it transpired that A was not the true owner. He had forged the signature of the true owner, C, on a transfer and had forwarded this forged transfer together with a stolen share certificate made out in C's name to the company.

The company, without negligence or fraud, then issued the certificate to A.

The court held that C, as true owner, was entitled to have his name restored to the register.

Case: Daily Telegraph Co v Cohen (1905) 5 SR (NSW) 520

Shares were sold under a purported exercise of a power of attorney. The power of attorney and associated transfer of shares were later held to be void.

The original owner's name was therefore restored to the register. In the meantime, the transferee had in turn


S.P.Brown | 212175898 pg. 36

transferred the shares to Cohen. Cohen's name was removed from the register, but the company was held liable in damages to him because it was estopped from denying that his transferor was the true owner as it had previously certified.

Liability of Members

Liability to pay on call for partly paid shares Section 254M

o If shares in a company are partly-paid, the shareholder is liable to pay calls on the shares in accordance with the terms on which the shares are on issue.

1. Liability to contribute on winding up Section 515

o Subject to this Division, a present or past member is liable to contribute to the company's property to an amount sufficient: (a) to pay the company's debts and liabilities and the costs, charges and expenses of the winding up; and (b) to adjust the rights of the contributories among themselves.

Section 516 o Subject to sections 518 and 519, if the company is a

company limited by shares, a member need not contribute more than the amount (if any) unpaid on the shares in respect of which the member is liable as a present or past member.

DIVIDENDS

1. Definition Dividends are the distribution of the company’s profits to

shareholders Section 124(1)(d)

o A company has the powers of a body corporate including the power to “distribute any of the company’s property among the members, in kind or otherwise”

2. Procedure for Payment

A. Procedural Rules Rules governing the procedure for payment of dividends are

contained in either: o Replaceable Rules o Constitutions

Generally the directors determine that dividend is payable and the amount

B. Replaceable Rules

s.254U: (1) The directors may determine that a dividend is payable and fix:

(a) the amount; (b) the time for payment; and (c) the method of payment.

The methods of payment may include the payment of cash, the issue of shares, the grant of options and the transfer of assets. (2) Interest is not payable on a dividend. s.254W(2): Subject to the terms on which shares in a proprietary company are on issue, the directors may pay dividends as they see fit.

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html




http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s601c.html














S.P.Brown | 212175898 pg. 37

3. Can Shareholders Force Payment? General rule:

o No o Shareholders cannot force directors to pay dividend

even though a company has available profits Exception:

o In exceptional circumstances the refusal by directors to recommend a dividend may amount to oppressive or unfair conduct

o Remedy under s.232 (Members Remedies) o See Sanford v Sanford Courier Service Pty Ltd at

17.130 Effect of Declaring a Dividend

1. When does a debt arise? Common Law

o Once a dividend is declared it becomes a debt owed to the subject matter: Marra Developments Ltd v BW Rofe Pty Ltd [1977]

Section 254V o 1) A company does not incur a debt merely by fixing

the amount or time for payment of a dividend. The debt arises when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then.

o 2) However, if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared.

2. Declaration of Interim Dividend: when does a debt arise?

What are interim dividends? o Distinction between final and interim dividends o Interim dividends are estimated and provisional

dividends Revocable

o Declaration of an interim dividend does not give rise to a debt

o An interim dividend may be revoked before payment: Marra Developments Ltd v BW Rofe Pty Ltd [1977]

3. Old Law: Dividends must be paid out of Profits Pre June 2010 Dividends

o A dividend may only be paid out of profits of the company

o Statutory entrenchment of common law rule in Re Exchange Banking Co (Flitcroft’s case) (1882)

Maintenance of Share Capital o Payment of dividends can not be used as means of

returning capital to shareholders contrary to the maintenance of share capital doctrine

What are Profits? o Not defined in Corporations Act o Profits refers to accounting profits o Re Spanish Prospecting CO Ltd [1911]

““Profits” implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business in the year... If the total assets of the business at the two dates be compared, the increase which they show at the later date as compared with the earlier date ... represents in strictness the profits of the business during the period in question.”

4. New Law: “Profits Test” replaces

Section 254T: Company may not pay dividend unless: o Company’s asset must exceed its liabilities (balance

sheet solvency) o Payment of dividend must be fair and reasonable to

shareholders as a whole o Payment of dividend must not materially prejudice

company’s ability to pay credits

5. Remedies for Improper Dividend Payment Unauthorised reduction of capital

o Dividends paid other than in accordance with s.254T may involve a reduction of capital

o If reduction not authorised by s.256B, company contravenes s.256D

Dividend payment not invalidated


S.P.Brown | 212175898 pg. 38

Directors involved liable for civil penalty order: s.256D(2)

Insolvent Trading o Payment of a dividend by an insolvent company may

be insolvent trading o Directors contravene s.588G if they fail to prevent

company from incurring debt when there are reasonable grounds for suspecting company is insolvent

Directors may be personally liable to compensate company’s creditors

Breach of Fiduciary Duty

o Payment of dividend by an insolvent company may constitute a breach of duty by the directors

o Directors who authorise dividend in breach of fiduciary duty may be personally liable to repay the amount of the dividend to the company

Injunction

o Company contravenes s.254T if it pays dividend other than out of profits

o s.1324 gives shareholders and creditors right to apply for injunction to restrain company from contravention if company’s insolvency is an element of the contravention

classes of shares topic 4: share capital, membership

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