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Company Law: Doctrine Of Capital Maintenance

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Question:

Discuss about the Company Law for Doctrine of Capital Maintenance

 

Answer:

Introduction

The doctrine of Capital maintenance is the fundamental principle in the corporate law. The main aim for the establishment of this principle is to provide protection to the creditors of the Company (Ewang 2005). The share capital of the Company is protected to give protection to the creditors. The main aim of the principle is:

Firstly, the capital which has been raised by the Company is used solely for the carrying out of the business of the Company, discharge liabilities and for the payment of the creditors of the Company; and

 

Secondly, The Company Obtains the Capital Raised by the Company (Hannigan 2015).

The capital of the Company is not to be used to repay back the members of the Company except in certain limited situations. The doctrine protects the share capital of the company for the protection of the creditors of the company (Fisher 1896). Many judicial interpretations led to the development of the doctrine. The Doctrine was mainly developed in the case of  Trevor v Whitworth (1887) it was held that the Company will not be liable to buy back the shares. The Company had almost bought back the entire shares of the Company. After the Company went into liquidation one of the shareholder of the Company asked for the amount which was due to him (Hannigan 2015). The amount was to be paid back to him after the buyback of the shares of the company. The Court held that the Company is to payback the shareholder his due amount. The House of Lords in his judgment said that the company does not have the right to buy its own shares even if there is criteria mentioned in the memorandum of association of the Company (Arnold 2016). The rule is so because that would reduce the share capital of the company. Where is has not been expressly implied by the Court that there can be a reduction in the capital the company cannot reduce the share capital of the company (Hayek 1936). Provisions such as buyback of share capital, payment of the dividends or reduction for capital are mentioned in Section 17, 18 and 19 of the Act (Islam 2015). In Australia, the development of the Doctrine is enshrined under Section 256 A and 256 C of the Australian Corporation Act 2001. Reduction of share capital of the Company by the creditors is mentioned under Section 256 B of the Company. Australia is a country that receives funding from offshore for the capital infrastructural projects. The Corporation Act of Australia mainly handles the transactions, which affect the share capital of the Company and how the creditors are to be protected. Section 256 C and Section 257 A also lays down the exceptions to the doctrine (Knapp 2013). It lays down how the company can reduce the share capital and buy back its share. In the case of  Flitcrofts Case, the attributes of the Doctrine was established. The traditional capital system was replaced by a transparent and effective system. The creditors of the company are are given a more accurate information about the ability of the company to pay the debts and protect the creditors (Tomasic, R., 2015) .

Therefore it can be concluded that doctrine provide protection to the creditors of the company and several amendments were also made to make the doctrine more effective still  more cost effective provisions must be made to provide legal protection to the creditors. For the running of a business, smoothly the Australian Corporation law must be made more flexible and effective (Sappideen 2016).

 

References: 

Arnold, A.J., 2016. Capital reduction case law decisions and the development of the capital maintenance doctrine in late-nineteenth-century England. Accounting and Business Research, pp.1-19.

Ewang, F.N., 2005. The Capital Maintenance Doctrine Provides Essential Protection to Corporate Creditors: Myth Or Reality?. University of Adelaide, Law School.

Fisher, I., 1896. What is capital?. The Economic Journal, 6(24), pp.509-534.

Hannigan, B., 2015. Company law. Oxford University Press, USA.

Hayek, F.V., 1936. The mythology of capital. The Quarterly Journal of Economics, pp.199-228.

Islam, M.S., 2015. The Doctrine of Capital Maintenance and its Statutory Developments: An Analysis. Northern University Journal of Law, 4, pp.47-55.

Knapp, J., 2013. A Reconsideration of Consolidation Accounting Requirements and Pre?acquisition Dividends. Australian Accounting Review, 23(3), pp.190-207.

Sappideen, R., 2016. Reflections on Changes to China's Corporate Capital Law.

Tomasic, R., 2015. The Rise and Fall of the Capital Maintenance Doctrine in Australian Corporate Law.

Tsang, A.H., 2000. Maintenance performance management in capital intensive organizations (Doctoral dissertation, University of Toronto).

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