Corporate Law And Capital Maintenance

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Corporate Law And Capital Maintenance

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Corporate Law And Capital Maintenance

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Question:
Discuss about the Corporate law and Capital Maintenance.

Answer:

Creditors of a company provide it with key resources to continue its business operations. However they are subjected to various risks as the main control of the company’s affairs are in the hands of the directors (Simões 2013). The directs of a company in order to gain maximum personal interest may at any time buy back the shares of the company which will leave the creditors with nothing as the company is a separate legal entity. The overall objective of the doctrine of capital maintenance is to protect the creditors of the company which they may be subjected to because of the actions of the directors. The doctrine has first been brought to the lime light in England from the case of Trevor v Whitworth (1887) where the court imposed restriction on a company from buying its own shares. According to the doctrine of capital maintenance it is the duty of the directors to obtain the the total amount of consideration for the shares the company has issued. The directors of the company are further restricted from making any repayment to the shareholders with respect to the amount paid by them except is very rare and limited circumstances. With respect to such provisions the doctrine provides rules and regulations in relation to the payment of dividends, using financial assistance and share repayment or buyback.
Like most of the common wealth countries Australia has also incorporated the concept provided by the doctrine into its corporation law. The concept relating to this doctrine has been brought into the corporation law of Australia through the Corporations Act 2001. However its incorporation was often subjected to debates. The critics of the doctrine provide that the doctrine has a very restrictive approach which hampers and hinders the proper functioning and growth of a registered corporation (Bradbury 2015). If the company is deprived of the liberty of share buy backs and reduction of capital than it would evidently make it suffer losses at the time when the market is down. Keeping this aspect of the doctrine in mind the Australia law makers have provided the doctrine with a liberal approach through the various sections of the corporations act (Hannigan 2015.)
Section 257 A of the Corporation Act enables the directors of a company to buy back its shares only if such buyback does not in any was affect the position of the company to make repayments to its creditors. The Section further provides that the company has to abide by the procedures in relation to share buyback which have been incorporated into the Act through section 257 D. The company has to pass a special resolution at its general meeting. The resolution has to be passed without giving any voting rights to the share holders whose shares are to be bought back. All documents in relation to the offer of buy back proposed by the company have to be registered with the AISC before such buy back is continued (Hendricks and Blackwood 2014).
Thus it can be analyzed through these Sections in relation to share buyback and capital reduction that the Australian corporation law has made best effort to ignore the ill effects of the doctrine and only incorporated the concept of providing protection to creditors within it.

References
Bradbury, M.E., 2015. Capital maintenance in a contemporary context. Available at SSRN 2500017.
Hannigan, B., 2015. Company law. Oxford University Press, USA.
Hendricks, R. and Blackwood, C., 2014. Capital management. Tax Specialist, 17(5), p.222.
Simões, F.D., 2013. Legal Capital Rules in Europe: Is There Still Room for Creditor Protection?. International Company and Commercial Law Review, 24(4), pp.166-172.
Bibliography
Robak, A., Landers, S., Bush, S., Hunter, E. and Greaves, R., 2015, June. A Case for Breaking Down the Capital-Maintenance Barrier. In 9th International Conference on Managing Pavement Assets.
Brief, R.P., 2013. Depreciation and Capital Maintenance (RLE Accounting). Routledge.

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