Principle Of Capital The Maintenance

How Do To Principle of Capital the Maintenance?

The principle of Capital maintenance postulates that a firm must receive proper compensation for its shares and must not repay it to the shareholder except under exceptional situations. Profoundly, this doctrine was first developed in the mid-19th Century in the United Kingdom (Kaplan, n.d.). Today, this doctrine has become less relevant in the contemporary business world. Most companies have a relatively small share capital and consider the capital maintenance regulations as unduly complicated. Others argue the rules of the principle have been overtaken by their exceptions. As a result, various countries such as Singapore, Australia, and the UK, and have restructured their capital maintenance guidelines over the past years to suit their specific needs.

In Trevor v Whitworth, a firm purchased most of its own shares. During its termination, one member applied for the balance of funds that the company owed him after the purchase. The court ruled that he should be compensated (Islam, 2013). Contrariwise, The House of Lords argued that the purchase was void, declaring that the business cannot buy its own shares despite the fact that there was a provision for that in the company’s memorandum. It also held that there could be no refund of funds to the shareholders other than on an appropriate reduction of capital authorized by the court. Thus, this case law applied the rule that stipulates that on the liquidation of a firm, members can retrieve their money only after all creditors have been reimbursed.

Benefits of the doctrine

Fundamentally, the benefits of the doctrine lie in the fact that it sought to safeguard the interests of creditors. In addition, it aimed at ensuring the lawful utilization of the assets of a business. Markedly, this principle has developed through a sequence of judicial interpretations in company case law. For instance, in the Flitcrofts Case, Jessel M. R. incidentally stated some aspects of this rule (Islam, 2013). First, the creditors have a right to ensure that the funds of a business are not used improperly. It also highlighted the fact shareholders should not be refunded their capital secretly. Here, the case was argued on the basis of the rules of capital reduction and company distributions.

Exceptions to the doctrine

It is imperative to note that there are certain exceptions to the doctrine of maintenance of capital. In Bangladesh, the rule on the reduction of capital proposes that a firm that is limited by shares does not possess the right to purchase its own shares or those of a public firm unless the consequent reduction is effected and sanctioned as per the requirements set out in sections 59 to 70. With regards to the purchase of shares, a company limited by shares cannot purchase its own shares except if it follows appropriate measures as outlined under Companies Act of 1994 (Hannigan, 2012). Likewise, in England, exceptions have been made pertaining to the reduction of share capital. The CA 2008 allows private companies to condense their capital through a special resolution reinforced by a statement of creditworthiness issued by all the managers.

Reference List

Capital maintenance. Kaplan Financial Knowledge Bank, [online]. Available at <https://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Capital%20maintenance.aspx> [Accessed 21 May 2017].

Chapter 3: Capital maintenance. Cr.gov, [online]. Available at < https://www.cr.gov.hk/en/publications/docs/062008_ch3-e.pdf > [Accessed 21 May 2017].

Hannigan, B., 2012. The doctrine of capital maintenance. Oxford Index, [online] (Last updated June 2014). Available at <https://oxfordindex.oup.com/view/10.1093/he/9780199608027.003.0020> [Accessed 21 May 2017].

Islam, S., 2013. The Doctrine of Capital Maintenance and its Statutory Developments: An Analysis. The Northern University Journal of Law, 4, pp. 47-55.