The Capital maintenance Doctrine
Trevor v Whitworth (1887) 12 App Cas 409Capital maintenance can be defined as the process through which a company ensures that its capital is protected towards the best interest of the company. Capital maintenance in a company is done to protect its creditors. It is a well known fact that the directors of the company are provided protection through the principle of limited liability. Although this principle is necessary in order to ensure that a fair protection is provided to the directors it makes the creditors of the company vulnerable to the immoral activities directors may do with respect to gaining personal profit at the expense of the company (Arnold 2016).
The doctrine in relation to capital maintenance originated from the English legal system. One of the land mark cases in England which provided for the need and concept of such a doctrine is the case of Trevor v Whitworth (1887) 12 App Cas 409. In this case it was ruled by the court that directors cannot reduce the capital of the company and also they are not allowed to buy back the shares issued by them. The doctrine provides that a company should gain sufficient consideration in relation to the share capital issued by it. The doctrine further provides that the gained capital through share issue is not entitled to be paid back. The doctrine when it was brought into corporation law had a very strict approach thus the cons of the doctrine has been a big issue for its critics.
In Australia this doctrine has been introduced to the legal system through the various sections of the Corporation Act. However it is to be noted in this case that Australia does not uses the doctrine as it is, many amendments have been done to the original doctrine by the Act so that the law is benefited by its advantages (Fine 2016).
The doctrine of capital maintenance provide rules in relation to providing loans, guarantee, forgiving debt, securities for personal loans, share capital reduction and buy back its own shares.
In Australia the directors of the company are allowed to make capital reduction and share buyback through if the provisions provided in section 257 A of the act are complied by them. The basic requirement provided by the section is that directors must take into account the concept of fairness, reasonableness and insolvency before doing any such act along with the compliance with procedures provided in section 257 D of the Act. The directors must also in relation to capital reduction abide by the directors duty as provided in Section 180-183 of the Act. Section 260 A(1)(a) of the Act provides financial assistant can be provided by the directors of a company only if such actions do not prejudice the company materially with respect to its liability of paying back the creditors. Further the directors cannot claim the protection under the principles of limited liability if they are found guilty of doing any insolvent trading according to the provisions of section 588G the Act (Hill 2014).
It is clear and evident that the doctrine is very much the part of the Australian corporation law to the extent where is does not restrict the proper functioning of the corporations.
Arnold, A.J., 2016. Capital reduction case law decisions and the development of the capital maintenance doctrine in late-nineteenth-century England. Accounting and Business Research, pp.1-19.
Fine, B., 2016. Marx's" Capital". Springer.
Hill, J.G., 2014. Evolving Directors’ Duties in the Common Law World. RESEARCH HANDBOOK ON DIRECTORS'DUTIES, A. Paolini, ed., Edward Elgar Publishing: Cheltenham, pp.3-43.