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Business Law Doctrine Of Capital Maintenance

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Business Law Doctrine Of Capital Maintenance

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Discuss about the Doctrine of Capital Maintenance.

The doctrine of capital maintenance is the most important principles of corporate law. It means that appropriate consideration for shares issued must be received by the company and the in particular circumstances, the members must be paid the received capital. This capital is hoarded by the companies in order to ensure safety of the creditors of the company. The court ensures that there is lawful dispersion of the capital by acting as a supervisor (Birt 2014).
The case of Trevor v Whitworth (1887), established this doctrine in which the House of Lords considered that a company was incapable of acquiring its own shares as it would lead to decrease in the company’s capital. It was also held that according to the authorization of the court, the members shall not be entitled to receive any capital without any deduction in the capital. In the Flitcrofts Case, Jessel M.R mentioned the following features of the capital maintenance doctrine. The following attributes are: firstly, a company cannot purchase its own shares. Secondly, the company’s shareholders are entitled to the payment of dividends. Thirdly, restrictions are imposed upon the a company to provide financial assistance in the purchasing of its own shares. Lastly, the doctrine of capital maintenance states the rules regarding the deductions in the share capital or reserves of the company (Ferran and Ho 2014).
The doctrine of capital maintenance has been incorporated in the Australian corporate law under section 256 A, 256 C of the Corporations Act 2001. This provision aims at ensuring fair dealings between the shareholders and the creditors along with protecting their interests. Section 256 C of the Act stipulates that the company’s share capital can be reduced only when it is approved by the shareholders and when it does not affect the paying ability of the company. However, in the year 1998, certain facets of the doctrine were relaxed by the countries due to the necessities of the modern businesses (Hannigan 2015). The company is allowed to decrease its share capital as per the doctrine under section 256 B and the company is allowed to buy back its shares as per the doctrine under section 257 A. The outdated capital system was outweighed by the transparent capital system that provides better security to the creditors.
In conclusion it can be stated that this doctrine failed to provide legal protection to the creditors even after many amendments. However, the provisions can be attained by cost-effective and efficient means. It is recommended that the Australian corporate law must remove the several restrictions imposed on the companies by incorporating more effective system that ensures effective business expansion.
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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