Capital Maintenance and its Statutory Developments

Question: Discuss about the Capital Maintenance and its Statutory Developments. Answer: Introduction: The doctrine of capital maintenance is a fundamental principle of company law. The doctrine emphasizes that before a company issues its shares, it must first obtain proper consideration for shares. Moreover, the company cannot repay its members except in particular circumstances. In fact, this doctrine focuses on a fundamental duty of companies to ensure that they safeguard capital on behalf of the creditors, giving the courts the mandate of supervising the dissipation of capital by the companies. In other words, the doctrine empowers the courts to determine if a companys capital is dissipated lawfully or otherwise. There are two reasons for the origin of this doctrine. First, it was developed by the English courts to protect the interests of the creditors. Second, the doctrine emerged to ensure that the dissipation of a companys assets is lawful. It is important to note that the courts have often been keen to keep a companys capital assets intact because it is the creditor who gives the company credit. Furthermore, the creditors give a company credit on the faith of representation that the company shall use it only for the purpose of the business. Therefore, the creditor has a right to say that the company shall keep or maintain its capital and shall not return it to its shareholders. Nonetheless, it is of great significance to note that the doctrine has undergone tremendous development through a series of case laws involving companies, particularly in England. For example, in Flitcrofts Case, the court indirectly held that there are two main aspects of capital maintenance: i) the creditors have a right to ensure that a companys capital is dissipated in a lawful manner; and ii) the company does not return the capital to the members surreptitiously. Accordingly, these two aspects are under the guidance of the rules of company distributions and capital reduction. Subsequently, In another English case, Trevor v Whitworth, the House of Lords held that even if a companys memorandum of association provided that the company could purchase its shares, it would be ultra vires for it to do so as that would lead to a reduction of capital. The court further held that a company cannot return capital to the members unless there is a proper reduction of capital that has been duly sanctioned by the court. In the Australian context, the principle under the Corporations Act 2001 (Cth) is that a company has a legal obligation to preserve its capital. Therefore, a company should not purchase overvalued assets, give away capital, or buyback shares where such reduces the companys capital. Nonetheless, the Corporations Act 2001 (Cth) provides exceptions to the doctrine of capital maintenance, thereby allowing a company to reduce its capital under particular circumstances. For example, s 256B of The Corporations Act 2001 (Cth) provides that a company can reduce it s share capital if it satisfies three requirements. Other exceptions to the doctrine of capital maintenance under The Corporations Act 2001 (Cth) are stipulated under s 260C(5)(a), s 260C(5)(b), s 260C(5)(c), and s 260C(5)(d). Overall, due to the availability of many exceptions to instances where a company can reduce its capital under The Corporations Act 2001 (Cth), it is opined that the doctrine of capital maintenance has been watered down in the Australian corporate law. The numerous statutory exceptions that allow a company to reduce its capital lead to the conclusion that although it is necessary, the doctrine is no longer part of the Australian corporate law. References Davies, P.L., 2008. Gower Davies: the principles of modern company law. London, UK: Sweet Maxwell. Islam, M.S., 2015. The Doctrine of Capital Maintenance and its Statutory Developments: An Analysis. Northern University Journal of Law, 4, pp.47-55. Morris Ren Crabb, L., 2009. Charlesworth and Morse Company Law. London, UK: Sweet Maxwell. Tomasic, R., Bottomley, S. and McQueen, R., 2002. Corporations law in Australia. Leichhardt NSW, Australia: Federation Press.