In corporate law, one of the most important regulations is the capital maintenance doctrine. It states that any organisation has the right to receive the necessary compensation for its issued shares, and the affiliates will be paid the received capital only under certain conditions. The capital is accumulated by the organisation for the security of the company’s beneficiaries. In order to ensure lawful dispersion of the capital, the proceedings are managed by the Court (Tomasic 2015).
The case Trevor v Whitworth (1887) saw the establishment of this doctrine. A company owned by the House of Lords could not procure its own shares to prevent a decrease in their capital. Moreover, there was an implication that no capital would be given to the affiliates without the Court imposing a decrement. Jessel M.R. cited the key features of this doctrine in the context of the Flitcrofts Case. The following are the key features: firstly, shares cannot be bought by an organisation itself. Secondly, the reimbursements from the proceeds are the rights of the stakeholders. Thirdly, no monetary aid is to be issued by any organisation for buying its own shares. The legal rules regarding write-offs in the reserves of a company are also charted out by this doctrine.
Initially, the doctrine had been established over the Company Act 2006 in England (Arnold 2017). In Australia, monetary aid to free and re-buy shares, problems related to the payments from the proceeds and the reduction in the share values of a company –– all are taken care of by this Act. Under sections 256A and 256C of corporate law, the Corporations Act 2001 of Australia introduced this Capital Maintenance Doctrine. It intends to safeguard the interests of the beneficiaries and the stakeholders, and makes sure that the negotiations between them are fair and just (Knapp 2013). If the stakeholders agree, the organisation’s share capital can be decreased, provided it does not bring about a compromise in the organisation’s ability to give them the funds, as mentioned in Section 256 C (Islam 2015). Section 256 B and 257 A enable an organisation to reduce their share capital and buy its own shares back, respectively. This provides improved security to the beneficiaries.
To conclude, the doctrine was unsuccessful in providing legal immunity to the beneficiaries despite the many changes. The theories outlined by the doctrine can, however, be achieved by profitable and compliant methods. The Australian corporate law needs to implement a more efficient system to reconstitute any organisation’s limitations, thereby warranting an efficient strategy of growth.
Arnold, A.J., 2017. Capital reduction case law decisions and the development of the capital maintenance doctrine in late-nineteenth-century England. Accounting and Business Research, 47(2), pp.172-190.
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.
Tomasic, R., 2015. The Rise and Fall of the Capital Maintenance Doctrine in Australian Corporate Law.