Maintenance of Capital Doctrine

Question: Discuss about the Maintenance of Capital Doctrine. Answer: Introduction: The concept of maintenance of capital is an element of the company law which regulates the amount of capital that should be held. For instance, any company must hold and not go below its capital. The reason behind this is that the liability of the stakeholders should not be compromised in case the company is faced with bankruptcy issues. Therefore the doctrine was designed to safeguard the continuity of the business as well as to cater for the interest of the creditors. Creditors play a crucial role in the success of any business because they offer credit to the companies which is paid back with interest. (Monk, 2009) From the above introduction, we may attribute the origin of the capital maintenance doctrine to two fronts. One of them is the interest of the creditors as mentioned above. Secondly, the assets factor should be considered and the manner in which they can be dispersed leads to the origin of the doctrine. (Ranganathan, 2013). The judicial implications in the matter provide the relationship between the two fronts, in that the court enforces the law for a company to hold a given amount of capital which will favor creditors in future. In the event that a company is unable to pay debts out of its investment returns, the creditors would employ this doctrine to claim their dues in that the capital reserves would be used to clear the debts. For this reason, companies are prohibited from paying back the shareholder contribution and instead pay dividends from the profits that have been accrued. (Spillane, 2010) The capital maintenance doctrine has been developed over time using case precedence and legislation. Scholars across the world, for example Jessel M.R of England are credited for designing this doctrine. His ruling in the Flitcrofts case was a land mark step. Other remarkable scholars included Trevor and Whitworth who cited a case whereby a company repossessed part its shares from the shareholders against the company law. (Spillane, 2010). After the transaction, one of the shareholders claimed more payment from the company and he had his way. The courts interpretation was that no company was allowed to buy its shares since that amounted to reduction of capital. Furthermore, the court went ahead to conclude that creditors must be considered while winding up a company. Consequently, this forms the only event under which a company can refund the capital to the shareholders. (Ranganathan, 2013) Unlike other economies, the Australian government has taken a different turn regarding the issue of the capital maintenance doctrine. There are no strict measures concerning the amount of capital to be held by a company. Due to these liberal ideologies, Australian legislators have posed arguments that border on various issues that should be addressed first. They consider this doctrine as oppressive and feel that questions of company solvency and revelation of some material information should be availed to the shareholders. The final opinion about the Australian law is that they should consider incorporating the doctrine in their laws because the country anticipates many investors who come from other parts of the world and would need the kind of protection that the doctrine offers. (McChesney, 2012) References McChesney W.A (2012). The New Generation of Risk Management for Hedge Funds and Private Equity Investments. Cengage Learning. Boston, Massachusetts Monk, E.W. (2009). Monopoly-Finance Capital and the Paradox of Accumulation. John Wiley and Sons Ranganathan, C.I. (2013). Framework for the Preparation and Presentation of Financial Statements. Cambridge University Press, New York Spillane, J.B. (2010). Forms of Capital and the Construction of Leadership. European Operational Research