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Law Of Business Organization: Economic Doctrine

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Question:

Discuss about the Law of Business Organization for Economic Doctrine.

 

Answer:

The doctrine of capital maintenance was developed in order to ensure that creditors were protected from companies. Earlier on, there were cases of companies failing to repay their creditors and the creditors could not recover their money. The doctrine ensures that people who own shares in particular companies do not withdraw their shares at the particular time that the company has any credit running. This is because the shares act as a guarantee to the creditor that they will be able to recover their money (Scumpeter, 2013). It is important that companies are able to repay their creditors in order to prevent them incurring any losses which may come as a result of the company’s failure. However, there a number of cases in which a shareholder can be allowed to dispose their shares and this can only be undertaken by the court. It is the same doctrine that lays it down that the company cannot buy its own shares unless allowed to under the process by the court or on special circumstances allowed by the law. The doctrine of capital maintenance although beneficial to the creditors it does not do the shareholders a favor. This is because there no freedom for them to do what they want with their shares.

There are a number of sections that are unique in the doctrine of capital reduction. One such section is S256b which specifies factors that are important before a company can be allowed to undertake a capital reduction. Being fair and reasonable in their decision is one of the factors that should be considered by the court before allowing it to undertake a reduction. The company must ensure that non- of the members suffers as a result of the decision. The other factor that is taken into consideration in the section is that of ensuring that the company still retains its ability to pay its creditors. In any case the company comes up with the decision to reduce its capital it must ensure that the capital left should be able to sustain the credit given to it and this move ensures that creditors are protected.  Section 256c allows for shareholders to agree having their shares reduced and the company should initiate the process immediately after the decision has been made (Murray & Hwang, 2011). Section 260A gives directions on conditions that a company can undertake the process of helping out in case any need arises. One of the conditions that are highlighted is that of ensuring that the help serves the best interest of the company. This in turn ensures that the company does not incur any loss.

 

References

Schumpeter, J., 2013. Economic doctrine and method (Vol. 4). Routledge.

Murray, J. and Hwang, E.I., 2011. Purpose with Profit: Governance, Enforcement, Capital-Raising and Capital-Locking in Low-Profit Limited Liability Companies.

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