The Rise and Fall of the Capital Maintenance Doctrine

Question: Discuss about The Capital Maintenance Doctrine. Answer: Maintenance of Capital Doctrine Maintenance of capital doctrine provides safeguard to the shareholders and the investors of the company. It started in mid 19th century by the companies of England to build up the interest of peoples to invest in their companies. They get a protection and under that the shares cannot be purchased back by the company who has issued those shares into the market to attract the investors so that the capital of the company can be increased (Accounting tools, 2013). The amount received by the company after selling the shares or debentures can only be used in further trading of the company nothing else than that. The reason for stopping the company to purchase its own share is that if they buy back the shares issued by them then they can simply pay off the investors and they can also reduce overall capital of the company (Tomasic, 2015). This can reduce the value of the shares of the company and shareholders can suffer a loss without any strong reason. Therefore, the amount received by comp any in form of investment in shares they are only allowed to invest that money in further trading and they cannot use it to pay off their debts (SSM, 2017). In a case Trevor vs. Whitworth, (1887) the court said that the capital of a company should be saved for the benefits of its creditors only and it should not be used in any other work except the one mentioned. Doctrine of Capital Maintenance restricts the liability of shareholders to the extent of the value of their shares in the company. This creates a confidence in investors mind about their money which is being invested. As result of maintenance of capital doctrine the Corporation Act of Australia prohibits few things they are. 1. Under section 256 B, share capital of the company is reduced. 2. Under section 254 T, dividend is distributed among the share holder by the company. 3.Under section 257 A to 257 J and 259 A, company is allowed to take back its own shares. In current scenario of Australia, dividend payment is based on English system where it is paid off from the profits of the company. But this system created a lot problem for the companies. Maintenance of capital doctrine is still followed in Australia but with some implementations. There is no surety by the company that its capita amount will remain same, it may be reduced in course of business / transactions. Maintenance of capital doctrine has benefitted few companies, now company having limited shares can work with little capital. It was more effective during the period of 20th century. References Trevor v Whitworth (1887) 12 AC 409 Tomasic, R. (2015). The Rise and Fall of the Capital Maintenance Doctrine in Australian Corporate Law. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2604018 [Accessed on 22/01/2017] SSM. (2017). Capital maintenance rules and share capital: simplifying and streamlining provisions applicable to the reduction of capital, share buyback and financial assistance. Retrieved from https://www.ssm.com.my/en/clrc/consultation-document/cd8 [Accessed on 22/01/2017] Accounting Tools. (2013). What is Capital Maintenance? Retrieved from https://www.accountingtools.com/questions-and-answers/what-is-capital-maintenance.html [Accessed on 23/01/2017]