Law of Business Organization Capital Maintenance

Question: Discuss about the Law of Business Organizationfor Capital Maintenance. Answer: The Doctrine of Capital Maintenance Capital maintenance is a significant principle of corporate law. It stipulates that limited companies are restricted from making any such payments out of the capital reserve of the company to the disadvantage of the creditors of the limited company[1]. The statutory provisions laid down in the Company Act necessitate the companies to exercise control upon the payments out of the capital reserves. The capital of a company includes all the money price of the assets obtained by the company from its shareholders in exchange for the shares of the company. This is regarded as an imperative financial resource for the companies[2]. The doctrine was developed through a number of case laws in England. It was recognized for the first time in the case of Trevor v Whitworth where it was held that the concept of capital maintenance is imperative for the companies as it protects the rights of the creditors who has made contribution in the capital of the company[3]. The contribution by the creditors act as a guarantee that they are entitled to repayment of the capital contributed. The common law rules states that a company is is permitted to return its capital to the investors or its shareholders following the lawful methods, that is, by way of reduction of the capital reserve of the company or by way of dividends[4]. The Company Act 2006 deals with the various distributive means by which a company can make payments to the shareholders. Section 135(2) (c) of the Act affirms that share buy backs, reduction in the capital, dividends are some of the distributive means a company may adopt to make payments to the shareholders[5]. The principle of capital maintenance has been incorporated in the corporation law of Australia and remains to be a part of the corporate law today. Section 256 A of the Corporation Act 2001 stipulates that a company must guard the interest of the creditors and its shareholders and retain the balance between the creditors necessities and the members contentment of restricted liability. The purpose of reduction in the capital reserve of the company is to ensure the safety of the creditors[6]. The court may intervene to reduce the capital to protect the claims of the creditors and ensure that the reduction retains the balance between the different classes of shareholders of the company. However, the capital reduction method has been criticized in the case Aveling Barford v Perion Ltd (1989) to be time-consuming and expensive. The doctrine prohibits the company to repay the capital it receives for issuing its shares to its members except under particular situations[7]. However, the statutory provisions of the doctrine have been modified keeping in view the growing demands and necessities of contemporary business. In the UK, the the doctrine was modified in 1980 where the the company was permitted to buy back the shares as stated under section 684-723 of the Companies Act 2006. In Australia, the Corporations Act 2001 incorporated provisions under section section 257 A-257 J which allows the company to purchase its own shares provided the buying back of shares is approved by the shareholders and that they are not prejudiced[8]. The doctrine has been criticized to be an outdated method and but scope of future modifications in the present capital maintenance regime must be made to ensure better functioning of the business organizations. Bibliography Alevras, S., 2015. Doctrines and rules associated with the payment of dividends: Some historical reflections.Governance Directions,67(3), p.164. 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. Baos-Caballero, S., Garca-Teruel, P.J. and Martnez-Solano, P., 2014. Working capital management, corporate performance, and financial constraints.Journal of Business Research,67(3), pp.332-338. Gullifer, L. and Payne, J., 2015.Corporate finance law: principles and policy. Bloomsbury Publishing. Islam, M.S., 2015. The Doctrine of Capital Maintenance and its Statutory Developments: An Analysis.Northern University Journal of Law,4, pp.47-55. Sez, M. and Gutirrez, M., 2015. Dividend policy with controlling shareholders.Theoretical Inquiries in Law,16(1), pp.107-130. Simes, 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. Tomasic, R., 2015. The Rise and Fall of the Capital Maintenance Doctrine in Australian Corporate Law.