Company Law: Capital Maintenance

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Company Law: Capital Maintenance

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Company Law: Capital Maintenance

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Question:
Discuss about the Company Law for Capital Maintenance.

Answer:

The Doctrine of Capital Maintenance
The capital maintenance doctrine is considered as one of theessential principles of corporate law. It stipulates that a company must receive appropriate consideration for the shares that it issues and the amount of capital received must be paid to the members only in particular circumstances. The company hoards the capital for the safety of the company creditors.The court act as asupervisor to ensure that the capital is dispersed lawfully[1].
This doctrine was established in the landmark case Trevor v Whitworth (1887) where the House of Lords held that a company could not acquire its own shares, as it would decrease the capital of the company. It was further held that the members would not receive any capital without a deduction in capital as authorized by the court. In the context of the Flitcrofts Case, the following essential features of the doctrine was mentioned by Jessel M.R . It includes the following essential attributes: firstly, a company is not allowed to buy its own shares. Secondly, shareholders of a company are entitled to the payments of dividends. Thirdly, a company is restricted from providing any financial assistance to purchase its own shares. Lastly, the doctrine also outlines the legal rules relating to the deduction in the company reserves or share capital.

The doctrine hasoriginally developed in England through the Company Act 2006[2]. The Actdeals with the issues related to dividend payments, decrease in the company share capitals, re-buying of shares and redemption of the shares of the company by providing financial assistance under sections 17, 18 and 19 of the Act respectively. In Australia, the Capital Maintenance doctrine has been incorporated in the Australian corporate law under section 256 A, 256 C of the Corporations Act 2001. The provision aims at protecting the interest of the creditors and the shareholders and ensuring fair dealings between them[3]. Section 256 C of the Act stipulates that the share capital of a company can be reduced provided the shareholders approve it and it does not hinder the ability of the company to make payments to them[4]. However, the necessities of modern business have convinced the countries to relax some facet of the doctrine of capital maintenance in the year 1998. The exceptions applicable to the doctrine under section 256 B allow the company to decrease share capital of the company and section 257 A permits the company to buy back its own shares. The introduction of more transparent and effective capital system has outweighed the outdated capital system. It ensures better protection to the creditors as it provides impartial and more accurate information to the creditors that allows the creditors to evaluate the capability of the company to pay debts.
From the above discussion, it can be concluded thatafter several amendments to the doctrine, it failed to provide legal protection to the creditors. However, the provisions contemplated by the doctrine can be attained by more efficient, flexible and cost- effective means. It is recommended that the Australian corporate law must incorporate more effective system to replace the restrictions imposed on the companies, hence ensuring effective expansion of business.

Reference List
Arnold, A. J. “Capital reduction case law decisions and the development of the capital maintenance doctrine in late-nineteenth-century England.” Accounting and Business Research (2016): 1-19.
Islam, Md Saidul. “The Doctrine of Capital Maintenance and its Statutory Developments: An Analysis.” Northern University Journal of Law 4 (2015): 47-55.
Knapp, Jeffrey. “A Reconsideration of Consolidation Accounting Requirements and Pre?acquisition Dividends.” Australian Accounting Review 23.3 (2013): 190-207.
Tomasic, Roman. “The Rise and Fall of the Capital Maintenance Doctrine in Australian Corporate Law.” (2015).

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