Capital Maintenance Doctrine

Question: Discuss about the Capital Maintenance Doctrine. Answer: Introduction: According to the doctrine of capital maintenance proper consideration has to be received by the company in relation to the shares issued by them and further the directors are not entitled to repay the amount received by the company and if so in very limited circumstances. The doctrine has been subjected to various criticisms from the day it has originated and therefore several amendments have been done to the doctrine in order to keep it alive in the fields of corporation law. The rule originated from the English case of Trevor v Whitworth1887 where the main issue was related to share buybacks. The court in this case held that share buybacks were unlawful. The doctrine was developed in the English law with the main aim of protecting the creditors and other shareholders of a company from any fraud which the directors may commit as they have major power over the companys affairs. The doctrine initially provided few legal rules with respect to capital maintenance which include distribution and payment of dividends, reduction in the share capital of the company, preventing a company from buying its own shares and preventing any financial assistance taken by the company in relation to share buyback. However the strict approach provided by the doctrine has been under scrutiny and criticism as it made the functioning of the companies very difficult. The doctrine of capital maintenance has been adopted by most of the commonwealth nations which includes Australia. The section 257 A of the Corporation Act 2001 allows the company to buy back their shares but only when such purchase does not harm the companys capability of paying back its creditors and the procedures laid down with respect to such action is adopted by the company. The section in form of a note further provides that if a company has its own constitution provisions relating to precluding share buyback along with restrictions can be added to the constitution. The sections also provide that redeemable preference shares are entitled to be bought back by the company but not on the terms on which they can be redeemed. The Act has made further amendments to the doctrine through section 257 J which sets out other provisions relating to share buybacks. The directors of the company are required by the new approach towards the doctrine to consider the factors relating to solvenc y fairness and disclosure before any decision on share buyback is made by the company. Section 588 G of the Corporation act provides that a director of a company can be personally liable to the breach of this section if factors relating to solvency are not considered by them before share buyback. Though the capital maintenance doctrine has been amended in many ways it is still used in the Australian corporate law after the strict approach provided by the initial doctrine has been abolished and a more liberal approach in relation to share buyback has been adopted. References Arnold, A. J. "Capital reduction case law decisions and the development of the capital maintenance doctrine in late-nineteenth-century England."Accounting and Business Research(2016): 1-19. Nobes, Christopher. "Accounting for capital: the evolution of an idea."Accounting and Business Research45.4 (2015): 413-441. Tolmie, Fiona.Corporate and personal insolvency law. Routledge, 2013. Trevor v Whitworth(1887) 12 App Cas 409