The Maintenance Of Capital Doctrine

Discuss about the Maintenance of Capital Doctrine.

 

History of Doctrine

The aspect of maintaining capital doctrine is a subject to debate from the very first day of its incorporation with the Australian Corporate law. The people had an assumption and perception that the doctrine was made to protect the creditors of an organization for assuring the application of equity capital by the organizational directors. There were gargantuan questions about the degree of achievement of the protective goals of this doctrine. For these issues, the legal statutes regarding the decisions of company capital of the corporate law has gone through a series of reforming process. As per the opinion of Gatt (2015, p.54), the first strategy depends upon linking decisions of corporate capital and the other upon solvency, disclosure of materials and fairness for the shareholders of an organization. The lawmakers of Australia had casted aside the prohibitive approaches in changes of corporate capital through mechanisms of permissive approach for procuring ease in the process of decision-making in capital related issues. The doctrine was established in the case between Trevor v Whitwwworth (1887) as the court depicted the need for an organization to stabilize the working capital for protecting the interest of the shareholders and creditors (Rickford, 2004, p.919).

Benefits of Doctrine

This doctrine has played a pivotal part in the aspect of regulatory capital of the banks and large scale corporate sectors. It has generated immense ease in the process of Commonwealth government’s FSI or Financial System Inquiry. As per the statement of Rickford (2004, p.910), it can be used to prevent the organizations to buy the shares of their own. Through this doctrine, the creditors of a company can have sustainable ground to protect their interest in the flow of working capital of a company. The section 260A reveals another assertive benefit of financial assistance in order to acquire shares by a holding company based on capital flow. This can be massively helpful to remain the capital same through a proficient process of maintenance that can procure equilibrium between flow of capital and subscribed capital (Austlii.edu.au, 2017).

Exceptions to the Doctrine

The section 257B of the Australian Corporations Act 2001 reveals the provision for the companies to buy back the shares with exception in capital maintenance. This division procures a massive exception as the companies can follow the process depicted through this section. There is another exception in the doctrine as the section 259A reveals the process of acquiring share bonds with direct process.On the other hand, this can be helpful to enhance transparency as in the section 256B of the Corporations Act 2001 of Australia; a company can make reduction in share capital only with authorization of the shareholders. Under this exception, the shareholders do not prejudice the ability of the organization in paying back the creditors through maintaining the capital flow. On the other hand, these exceptions can open up portal for the companies to re-purchase the share bonds from the creditors in order to maintain the capital structure of the organization intact to foster effectiveness in the maintenance (Austlii.edu.au, 2017).

Reference List

Austlii.edu.au (2017). Corporations Act. Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s260a.html [Accessed on 14th may 2017]

Austlii.edu.au (2017). Corporations Act. Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s259a.html [Accessed on 14th may 2017]

Gatt, K., (2015). The doctrine of capital maintenance with particular reference to the reduction of share capital. A legal and fiscal perspective. 2(5), p.54

Rickford, J., (2004). Reforming Capital Report of the Interdisciplinary Group on Capital Maintenance. EuR. Bus. l. REv., 15, p.919.