Worthless shares

When companies are placed in liquidation or administration, the shares they have on issue may become worthless. In this situation, company law may restrict investors being able to transfer these shares to other investors. 

A declaration may be issued in writing by either the liquidator or administrator, as relevant, stating: 

• for shares, that there are reasonable grounds to believe there is no likelihood that shareholders in the company will receive any further distribution for their shares.
• for financial instruments, that the financial instruments have no value or have only negligible value.

At this point the investor may choose to realise a capital loss on their worthless stock.

Where the above requirements for declarations are not satisfied, an investor may not claim a capital loss.

There are generally three options to crystallise a capital loss in respect of worthless shares. These are:

1. Continue to hold the worthless shares and wait for a court order to be issued cancelling the shares.
2. Where the relevant declarations have been made by the company administrator or liquidator, an investor may claim a capital loss in the income year the declaration is made.
3. The investor may be able to sell their shares or financial instruments. Certain organisations such as delisted.com.au provide a service where they will purchase certain worthless shares.

If no declaration is made by a liquidator or administrator, or the investor hasn’t chosen to make a capital loss following a declaration, an investor may make a capital loss on their worthless shares when a court order is given to dissolve the company and the shares are cancelled. 

Additionally, if a company is wound up voluntarily, shareholders may realise a capital loss either three months after a liquidator lodges a tax return showing that the final meeting of the company has been held, or on another date declared by a court.