Capital Maintenance Doctrine and Securities

Question: Discuss about the Capital Maintenance Doctrine and Securities. Answer: Introduction The doctrine of capital maintenance enjoins a company to safely maintain its capital for the benefit of creditors and allow the courts to ensure check if it has been lawfully spent (Saidul, 2013). It is an important principle in company law that requires the company to obtain a lawful consideration fro all the shares that it may seek to issues. The main principles that underpin this doctrine include the prohibition of a company purchasing its own shares and the payment of dividends to shareholders (Saidul, 2013). According to the doctrine, the profit that is made by the company is not to be recognizes unless the amount of the net assets owned by the company is maintained. Origin and Rationale of the Doctrine It is imperative to note that the doctrine has been developed as result judicial interpretation. In Flitcrofts Case (1882) the court highlighted two components of the doctrine; that the creditors have the right to check and ensure that the capital of the company is not used or shared unlawfully and that the capital of the company should not be incongruously shared to the members of the company by way of shares. In the case of Trevor v Whitworth (1887) a company bought a significant amount of its own shares from the company. It was held that such an action would lead to the reduction of the capital owned by the company and therefore the company was first obligated to pay the shareholder the amount of his contribution upon liquidation. As a matter of course, it was held in Aveling Barford Ltd. V. Perion Ltd (1989) that the shareholders of a company are entitled to their contribution to the capital upon liquidation, but the creditors will be given priority during the payment. It bears n oting that the doctrine of capital maintenance has mainly originated from the development of English case laws. The rationale for the existence of the doctrine is largely two fold. First it seeks to protect the interest of the creditors and secondly it ensures that the capital of the company is lawfully used. The courts have been vigilant in protecting the capital of the company so that it remains intact for the creditors (Zahir, 2000 p 50). Application of the Doctrine in Australia The capital maintenance doctrine is a weakening phenomenon in Australia. This has been demonstrated by the fact that most of the financial institutions such as banks do not maintain an intact capital that will prevent them from the adverse effects of a financial crisis (Gluyas, 2014 p 23). According to Roman (2016) there has been limited regulation on the use of capital in Australia. Australia has recorded an upsurge in flexibility in the freedom of use of capital but the same time the protection of the creditors has also been a top priority (Roman, 2016). It can thus be conceded that the doctrine of capital maintenance is debilitating in Australia and its application is losing relevance in most companies and financial institutions. References Aveling Barford Ltd. V. Perion Ltd (1989) BCLC 626 at p. 630-3. Flitcrofts Case (1882) 21 Ch. D. 519. Gluyas, R (2014) Capital hijacks Murray inquiry as regulators put stability before credit creation, The Australian, Roman, T (2016) The Rise and Fall of the Capital Maintenance Doctrine in Australian Corporate Law, Commercial Law in the Twenty-first Century Forum, Tsinghua University, Beijing Saidul, I. ( 2013) The Doctrine of Capital Maintenance and its Statutory Developments: An Analysis , The Northern University Journal of Law Trevor v Whitworth (1887) 12 App. Cas. 409. Zahir, M. (2000) Company and Securities Laws, , The University Press Limited, Dhaka