Company Law: Trevor V Whitworth (1887) Essay

Question:

Discuss about the Company Law for Trevor v Whitworth (1887).

Answer:

The Doctrine of Capital Maintenance

The doctrine of capital maintenance is considered most vital principle amongst the principles of the corporate law. This stipulates that the amount of capital received by a company must be paid to the members only under certain circumstances as the company is bound to receive appropriate consideration for the shares issued by it. In order to ensure the safety of the creditors, the companies hoard the capital. Acting as a supervisor, the court ensures the lawful dispersion of capital (Birt 2014).

Trevor v Whitworth (1887) was the case in which the doctrine of capital maintenance was established. In this case, the House of Lords stated that the company is not permitted to acquire its own shares as it results in reduction in the company’s capital. Further it was held that the capital shall not be received by the members unless there is a deduction in the capital as per the authorization of the court. According to the vital features of this doctrine mentioned by Jessel M.R, in context of the Flitcrofts Case, the company does not have the permission to buy its own shares. A company is bound to pay dividends to the shareholders out of the profits earned. A company is not allowed to provide any kind of assistance in terms of finance for the purchasing of its own shares. Lastly, the various legal rules relating to the deduction in share capital and the reserves of the company are outlined by this doctrine (Ferran and Ho 2014).

Section 256 A, 256 C of the Corporations Act 2001 of the Australian corporate law has incorporated the Doctrine of capital maintenance. The provision focuses on ensuring that the interests of the shareholders and creditors are protected and there is fair dealing between the two parties. Section 256 C states that the company is allowed to reduce its share capital only after obtaining permission from its shareholders and only after ensuring that the company shall be able to make proper payments. Due to changes in modern businesses, certain facets of the doctrine were relaxed in 1998. However, section 256 B permits the companies to reduce share capital and section 257 A allows the companies to buy back their shares. The more effective capital system provides better protection to the creditors (Hannigan 2015).

Therefore, it can be concluded that the doctrine failed to provide legal protection to the creditors despite several amendments. It is recommended that the Australian corporate law must reduce the restrictions imposed on the companies in order to ensure effective expansion of businesses.

References:

Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J. and Janson, P., 2014. Accounting: Business Reporting for Decision Making 5e.

Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.

Hannigan, B., 2015. Company law. Oxford University Press, USA.

Trevor v Whitworth (1887) 12 App Cas 409

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