Capital Maintenance and Solvency Requirements

Question: Discuss about the Capital Maintenance and Solvency Requirements. Answer: Introduction: Maintenance of capital doctrine is a compilation of legal rules. These rules ensure that a company gets hold the capital, which is purported to rise the security of investors. According to these doctrines, this capital is maintained in subject to requirements of the business for the protection and benefits of companys creditors. The general principles related to doctrine of capital maintenance were developedby courts.These doctrines have originated to protect the interest of creditors and to ensure the legitimate debauchery of assets of a company. However, the doctrine of capital maintenance has been developed through a series of different judicial analysis of company cases in England. In this way, the case of Jessel, indirectly stated two different aspects of doctrine of capital maintenance firstly, the creditors have the authority to observe that the capital is not dissipating unlawfully and secondly, the member must not have the capital returned to them surreptitiously. The different company case laws have been the basis of these doctrines of capital maintenance but UK has customized these doctrines into a relaxed way due to the inevitability of the modern business demand in various aspects. These doctrines of capital maintenance were first developed in United Kingdom in 19th century.In 1980, the rules governing the doctrine of capital maintenance were reformed and replaced in UK through a statutory procedure. According to these reforms, shares can either be classed as bought back or as redeemable under the companies Act 2006 sections 684-723. Further, in Australia buyback of share are allowed under sections 257A-257J of the Corporation Act 2001. These doctrines of capital maintenance were developed due to the restricted liability of shareholders in concern of flow of capital in a business. Therefore, the main objectives of these doctrines are established to prevent fraudulence and to ensure the liabilities of the shareholders in a business. Furthermore, the doctrines of capital maintenance are attempted to compromise the interest of creditors with complete satisfaction of their claims and managerial freedom in corporations.In addition, for the purpose of creditors protection the doctrines restrict payment out capital to the shareholders in different ways which are discussed as below: The dividend in a business can only paid out of distributable profits. For the reduction of capital court approval is generally required. Buy back of own shares from a company may generally made out through distributable profits or may be proceed by a new issue of shares. The financial assistance of an individuals shares by a company is generally prohibited and saves in certain exceptions. The doctrine of capital maintenance is still a part of Australian Corporation law because both of these are related with the concept of shares and provides protection to the shareholders of the company. According to corporation law, a company is liable to pay the dividend to its shareholder in proportion of the amount of shares and the shareholders have authority to see the financial flow in the company. As well as, the doctrine of capital maintenance also provides protection to the shareholders from fraudulence and makes clear rules for the distribution of dividends to the shareholders. References: Dequest, J. (2013) Capital Maintenance and Solvency Requirements. [Online]. Available at: https://www.deguest.asia/en/blog/item/53-capital-maintenance-and-solvency-requirements (Accessed: 18 January 2016). Federal Register of legislation (2013) Corporation Act 2001. [Online]. Available: https://www.legislation.gov.au/Details/C2013C00003 (Accessed: 18 January 2017). Hannigan, B. (2012) The doctrine of capital maintenance. [Online]. Available at: https://www.oxfordlawtrove.com/view/10.1093/he/9780199608027.001.0001/he-9780199608027-chapter-20 (Accessed: 18 January 2017). Islam, S. (2013) The Doctrine of Capital Maintenance and its Statutory Developments: An Analysis, The Northern University Journal of Law, 4, pp. 47-55.