Law for Capital Maintenance Doctrine - MyAssignmenthelp.com

Question: Discuss about the Law for Capital Maintenance Doctrine. Answer: Doctrine of Capital Maintenance: This doctrine states that it is necessary that company receives proper consideration for the shares issued by company, and such capital must not be repaid to the members of the company except in some specific situations. This doctrine is considered as fundamental principle of company law. This doctrine specially focuses on fundamental duty of the companies for the purpose of retaining the capital of the company for the protection of creditors (Ewang, 2005). This doctrine provided the legal rules for some important areas such as dividend payments to shareholders and any other distributions, reduction related to share capital of the company and reserves, prohibition on provision related to financial assistance on company for purchasing its own shares, and redemption ad purchase of own shares by company. This can be understood through these sections: Section 256B of the Corporation Act 2001 states that company can only reduce its share capital by way which is authorized by law and such reduction must not affect the ability of company to pay its creditors. However, section 257 B states the valid procedure for buy back the shares for ensuring the protection of creditors of the company. Section 259A deals with the capacity of the company for directly acquiring its shares, and section 260A deals with the provision related to financial assistance by a company for acquiring shares in the company or a holding company (Corporation Act, 2001). Benefit of Doctrine: The main objective of this doctrine is to prevent fraud in the company, protect creditors of the company by reducing the share capital of the company, and to ensure the shareholders liabilities in the company. There are two reasons related to the origin of this doctrine and these reasons are firstly to provide protection to the shareholders of the company, and secondly to ensure the lawful dissipation of the assets of the company. However, courts always want to keep the capital of the company in intact form because a creditor of the company provides credit to the company (Tomasic, 2015). History of Doctrine: This doctrine is developed in England, through judicial interpretation series of company law cases. However, it must be noted that Jessel M. R., in Flitcrofts Case stated about the two aspects of this doctrine in indirect manner. They state that it is right of the creditor to ensure that capital o the company is not dissipated unlawful way and capital must not returned to the member surreptitiously. These two aspects are governed by the rule of capital reduction and company distributions. In case Trevor v Whitworth, company brought back its own shares, and at the time of liquidation of the company one of the shareholder of the company file application in Court for recovering the balance amount owned to him by the company after buyback. In this case Court of appeal stated that company should be paid to that shareholder, and as per House of Lords buy back of shares was ultra vires the company because company could not purchase its own shares (Islam, 2013). References: Tomasic, R. (2015). The Rise and Fall of the Capital Maintenance Doctrine in Australian Corporate Law. International Company and Commercial Law Review. Volume 26(5), Pp- 174-187. Islam, S. (2013). The Doctrine of Capital Maintenance and its Statutory Developments: An Analysis. The Northern University Journal of Law. Volume 4, Pp- 47-55. Ewang, N. F. (2005). The Capital Maintenance Doctrine provides essential protection to corporate creditors. University of Adelaide. Trevor v Whitworth (1887) 12 App. Cas. 409. Corporation Act 2001.