Emily Pritchard answers your burning questions relating to duty and the establishment of trusts. […]
To Buy-Back or Not to Buy-Back
Stephen Harvey, current as of: 26 October 2016.
We often encounter situations where clients ask us to prepare documentation for the buy-back of shares in a company, as a precursor to deregistering the company.
Under section 601AA(2) of the Corporations Act, a company can be deregistered if two conditions are satisfied:
- The assets of the company are less than $1000; and
- The company has no liabilities.
Sometimes the thinking here is that a share buy-back is required to enable a company to meet the conditions for deregistration. This seems to happen where:
- The company has more than $1000 in share capital on issue – some think that the company must buy-back (and cancel) some of the shares to reduce the assets of the company to less than $1000; or
- Equity shows up on the credit side of the ledger – it’s sometimes assumed this represents a liability.
The mistake that some practitioners make is to treat share capital as either an asset or a liability. The age-old accounting formula is Assets – Liabilities = Equity. Both Equity and Liability entries appear as a credit in the financials, but they are obviously not the same thing. Consider the following:
- If the share capital account balance is taken as a form of liability, a company can never be deregistered because the share capital account should always have a positive balance; or
- The share capital is a theoretical number representing the amount initially paid to the company; however, it is not usually represented by cash at bank (asset) of an equivalent amount.
The Corporations Act does not define the terms “asset” or “liability” for the purposes of section 601AA. Therefore, we need to assume that the meaning of these terms corresponds with accounting standards – which treat share capital as neither asset nor liability.
The good news is that there is no need to carry out a share buy-back before deregistering a dormant company, provided the assets are less than $1000 and the company has no liabilities.
Don’t hesitate to contact us if you’d like to discuss share buy-backs in more detail.