The protection of the creditors has always been major concern due to limited liability of the shareholders. Due to this reason, the doctrine of capital maintenance is a key principle of Corporate Law. The doctrine states that the capital received by a company must be paid to the members only under specific circumstances. The hoarding of the capital by the company ensures safety of the creditors of the company. The court ensures the lawful dispersion of the capital (Birt 2014).
The doctrine was established in the case of Trevor v Whitworth (1887) wherein the House of Lords mentioned that neither a company is permitted to acquire its own shares nor can the members receive any capital without deduction in the capital as per the court’s authorization. Through another case of Flitcrofts Case, Jessel M.R mentioned the features of the doctrine. Firstly, a company cannot buy its own shares. Secondly, the company is entitled to pay dividends to the shareholders. Thirdly, a company is strictly prohibited from providing financial assistance for the buying its own shares. Lastly, the doctrine states the laws pertaining to the deductions in the share capital and reserves of the company (Ferran and Ho 2014).
The doctrine has been incorporated under section 256 A, 256 C of the Corporations Act 2001 of the Australian Corporate Law. The doctrine focuses on the protection of interests of both the creditors as well as the shareholders. This doctrine also ensures fair dealings between shareholders and the creditors. As per the provisions under Section 256 C, the company is allowed to reduce its share capital only when the shareholders approve such act and only when the paying capacity of the company is not affected.
However, in the year 1998, the changes in the modern businesses have compelled the countries to make certain changes in the doctrine. Therefore, section 256 B permits the companies to decrease the company’s share capital and section 257 A allows the companies to purchase back their own shares. At last, the introduction of an efficient capital system resulted in better protection of the interests of the creditors by providing more accurate information to them. This allows the creditors to analyze the debt paying capacity of the company (Hannigan 2015).
Therefore, from the above discussion it can be concluded that despite several amendments, the doctrine has failed to provide proper safety to the creditors. It can be recommended that in order to ensure efficient expansion of the businesses, the Australian Corporate Law is required to incorporate more efficient system by reducing the restrictions on the companies.
Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J. and Janson, P., 2014. Accounting: Business Reporting for Decision Making 5e.
Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.
Hannigan, B., 2015. Company law. Oxford University Press, USA.
Trevor v Whitworth (1887) 12 App Cas 409.