Share Shank Redemption

The quirky interaction of the Corporations Act, an ASIC practice note and the tax law can create a nasty sting in the tail for ongoing shareholders following the redemption of preference shares by a company.

Section 254K of the Corporations Act 2001 provides that a company may only redeem redeemable preference shares out of profits or the proceeds of a new issue of shares made for the purpose of the redemption. A new issue of shares is often impractical.

Practice Note PN 68 issued by ASIC provides commentary on what is required when preference shares are redeemed out of profits. PN 68 requires an accounting entry to record the transfer of retained profits to the share capital account in order to preserve the capital of the company and to protect creditors.