Maintenance of Capital

Question: Discuss about the Maintenance of Capital. Answer: capital maintenance Capital maintenance is the process through which the company conserves and maintains the capital gained by it through issuing of shares and contributions from creditors. Maintaining and conserving share capital means no reduction in share capital without proper authorization along with limited scope for buying back own shares and providing mala fide financial assistant. Capital maintenance also involves restrictions of dividend payments which would affect the financial position of the company and make it incapable of being able to pay back its creditors. History of the doctrine The court in the case of Trevor v Whitworth(1887) 12 App Cas 409 ruled that a company must at any cost should not be allowed to buy back own shares as such actions by the company would account to misuse of the companys capital and would deprive the creditors of their rights (Deegan and Shelly 2014). Thus the capital maintenance doctrine originated from this case and has been used ever since by many nations specially the commonwealth nations. The use of the doctrine resulted in severe hardship for the companies as they were not able to operate properly because of the several restriction imposed upon them (Ferran and Ho 2014) Australia and capital maintenance The capital maintenance theory has been changed and polished in many different ways and then incorporated into the Australian legal system with the help of Corporation Act 2001. Share capital reduction Section 256 A 256 E deal with provisions in relation to the reduction of share capital by a company. According to section 256 A of the Act a company is allowed to make share capital if they comply with different provisions and procedures provided through the subsequent procedures (Birt et al. 2014). A company can reduce its share capital if the risk in relation to solvency of the company is addressed, the concept of fairness between the shareholders of the company is complied with and all material information in relation to the transaction is disclosed. The company can also make unauthorized share capital if such transaction is approved by shareholders, reasonability and fairness is addressed and it does not hamper the companys capability in paying its loans. Shares buy back The companies under the provisions of the Corporation Act Section 257 A-257 J are allowed to buy its own shares back. The transaction of share buy backs can only be continued by the company if it does not hamper the companys capability in paying its loans and all procedures and rules provided by the subsequent sections have been complied with by the company. the company can proceed with such transactions through passing a ordinary resolution under section 257 C and special resolution under section 257 D. the company also has file the offer documents with ASIC and provide a 14 day notice under section 257 E and 257 F respectively. The company also needs to disclose all related information under the provisions of Section 257G. Financial assistance A company is also allowed to offer financial assistance if it follows the procedures as laid down in section 260 off the Act. The directors of the company would be personally liable if they engage in insolvent trading and the concept of limited liability would not apply under the provisions of section 588G (Keay 2014). References: Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J. and Janson, P., 2014. Accounting: Business Reporting for Decision Making 5e. Deegan, C. and Shelly, M., 2014. Corporate social responsibilities: Alternative perspectives about the need to legislate.Journal of Business Ethics,121(4), pp.499-526. Ferran, E. and Ho, L.C., 2014.Principles of corporate finance law. Oxford University Press. Keay, A.R., 2014.Directors' duties. Bibliography Birch v Cropper(1889) 14 App Cas 525 Gerner-Beuerle, C., Paech, P. and Schuster, E.P., 2013. Study on directors duties and liability. Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law. Trevor v Whitworth(1887) 12 App Cas 409 Maintenance of Capital Question: Discuss about the Maintenance of Capital. Answer: 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. References 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.