The discussion is on the maintenance of capital doctrine. Maintenance of capital doctrine has always been a debate in corporate law since the late nineteenth century when it was implemented. It was assumed way back that these capital doctrine protects company’s creditors and also ensures that directors applies the equity capital in a proper way. If these equity capital are not invested in a proper way then investors would suffer losses. The main strategy lied within corporate capital decisions to various tests relating to fairness, solvency and material disclosures to shareholders. The Corporations Act generally adopts more permissive approach requiring that solvency, fairness and the disclosure issues should be satisfied by directors before capital related decisions are made. All these decisions would include dividend payment buyback of shares, reduction of share capital and even the provision of financial assistance to purchase shares. All these decisions are subject to the insolvent trading provisions as per the 588G of the Corporations Act.
Section 256B of the Corporations Act, 2001 explains the provisions regarding the reduction of share capital which are not otherwise authorized. This can be done in three different ways: (Austii, 2017)
- When it is approved by the shareholders under section 256C of the Corporations Act.
- When it is fair and reasonable to the shareholders of the company as a whole.
- When it does not materially prejudice the company’s ability to pay its creditors.
Section 257B of the Corporations Act, 2001 Describes about the procedure relating to the buyback of shares by the company. If a company needs to buy back its shares then it has to follow the terms and conditions which are mentioned under this section. Without the procedures and policies under this section a company cannot buy back its shares. (Austii, 2017)
Section260A of the Corporations Act, 2001 highlights provisions relating to the shares which a company should be holding in the holding company or any other company. This section was introduced so that it could determine the shares which are purchased by other company. There are certain procedures which needs to be followed and all were mentioned in this section.
Section 259A of the Corporations Act. 2001 highlights provisions relating to the shares which are directly purchased by the company. It covers situations where the company purchases its own shares. A company should not purchase its own shares except it is buying back its own shares or under a court’s order.
Austii, 2017. [Online]
Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s259a.html
[Accessed 14th May 2017].
Austii, 2017. austlii.edu.au. [Online]
Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s260a.html
[Accessed 14th May 2017].