Corporation Law Essay

10459 Words Oct 4th, 2013 42 Pages
Question 1
1. The principle or rule known as the maintenance of share capital is based on the need to protect shareholders and creditors. Share capital is the contribution made by shareholders by subscribing shares of the company. A company’s creditors can only look to the share capital for the payment in the event of a winding up. To protect creditors, a general rule known as the rule in Trevor v Whitworth was developed to prohibit a company from reducing its share capital because a reduction in capital would prejudice the rights of creditors. Moreover, the reduction would in effect diminish the pool of funds available to the company to pay its creditors. The rule in Trevor v Whitworth has been incorporated into Ch 2J of the Corporations
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Section 259 B of the Corporations Act 2001 prohibits a company from taking security over its shares or the shares of the company which controls it. Section 259C of the Corporations Act 2001 also provides that the issue or transfer of shares of a company to an entity it controls is void.
Besides, Section 256B(1) of the Corporations Act provides that a company may reduce its share capital in a way that is not otherwise authorised by the Corporations Act if the reduction is fair and reasonable to the company's members as a whole; and does not materially prejudice the company's ability to pay its creditors; and is approved by members under Section 256C of the Corporations Act 2001. Section 256C of the Corporations Act 2001 provided that a company may reduce its capital if the reduction is fair and reasonable to the company’s shareholders as a whole; and does not materially prejudice the company’s ability to pay its creditors; and is approved by shareholders.
2. Many companies elect to issue shares of two classes-ordinary share and preference share. However, there are differences between these two types of shares. Holders of ordinary shares are part-owners of a company and may receive payments in cash, called dividends. Ordinary shares will have the right to share equally in any dividends (if they are declared) with all other ordinary shareholders after all other claimants have been paid. Besides, ordinary shares have the right

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