The Capital Maintenance Doctrine originated from the United Kingdom in the mid - 19th century. The reasons for its development was; firstly, to protect the creditor’s interest, and secondly, to ensure that the dissipation of the corporation assets gets done under Law. This doctrine comprises of the rules that made to ensure that the company gets hold of the funds that it has supposed to have raised and, that the accumulated capital gets preserved. The maintained capital is subjected to the exigencies of the company for the benefit and safeguard of its creditors and also, for the discharge of the company’s liabilities. The law that supports the protection that the creditors have under the Company Act 2006 and the common law supports a challenge to transactions that cause harm to creditors. For example, when the transaction is at preference or undervalue.
The capital maintenance doctrine also referred as the Companies Act 2006 contain the major five areas of law such capital maintenance, distribution, reduction of share capital, financial assistance, and purchase of own shares. These areas were created about the preservation of capital, and also, elaborates the current deregulatory measures that got introduced. Under distribution, the outdated provision of the CA 1985 got restated in Part 23 CA 2006 and was effected in 1st October 2008, which applies to the distribution made from that day henceforth. The CA 2006 initiated the significant changes to the rules of the capital that were meant to cancel the statutory that prohibits giving a loan to private companies.
The Maintenance of Capital Maintenance Doctrine is still found under the Australia Corporation Act but, under the reform of other Jurisdictions, for example, the Solvency Test Approach. Australia amended its capital maintenance Acts in the current years with certain distinctions that fit its particular situations. The assumption behind the solvency test approach states that the law should ensure that the major risk problems, for example, the collapse of the company because it is the only situation that may make the company not to pay its creditors. Otherwise, all forms of distribution to the stakeholders such as payment of dividends, buy-backs, and capital returns are accepted. These distributions are allowed only when appropriate solvency test are met without distinctive between payment from the capital of profits.
Moreover, the Maintenance of Capital Doctrine is still an integral part of the Australia Corporate Law. It has its relevant statutory term in the rules that are found in Chapter 21 of the Corp Act 2001. These rules deal with the following types of transactions that are likely to affect the position of the capital on a company. First, it deals with the reductions in share buy-backs and shares capital of a corporation in part 21.1. Second, it impacts the self-acquisition and shares control by the company under section 21.2. Third, it deals with the financial assistance by a corporation when purchasing its shares in part 21.3, and lastly, it impacts the restrictions on the payment of dividends the companies under section 254T. These statutory Acts depend heavily upon the corporation being solvent prior getting into these types of transactions. Companies directors who get involved in these kinds of the transaction shall be held responsible if he does so on behalf of the company by breaching the solvent trading provisions in Section 588G.
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Islam, M. (2015). The Doctrine of Capital Maintenance and its Statutory Developments: An Analysis. Northern University Journal of Law, 4, p.47.
Tomasic, R. (n.d.). The Rise and Fall of the Capital Maintenance Doctrine in Australian Corporate Law. SSRN Electronic Journal.