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Maintenance of Capital Principle

Law of Associations: 200018
by

Marina Attala

on 14 January 2014

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Transcript of Maintenance of Capital Principle

Maintenance
of
Capital Maintenance of Capital Doctrine
Maintenance Capital Principle
Overseas Marina Yohana
Attala
16759783 Methinee Khanapanya
16728934 Jessica Elakis
16760846 A company law doctrine that requires a company limited by shares to maintain its share capital as a fund for the purposes of creditor assurance and protection “Paid-up capital may be diminished or lost in the course of the company’s trading;

that is a result which no legislation can prevent; but persons who deal with, and give

credit to a limited company, naturally rely upon the fact that the company is trading

with a certain amount of capital already paid...and they are entitled to assume that no

part of the capital which has been paid into the coffers of the company has been

subsequently paid out, except in the legitimate course of business.”

Lord Watson in Trevor v Whitworth (1877) 12 App Cas 409, 423 Trevor v Whitworth was based on the notion that the capital of a company should be preserved for the benefit of creditors At common law, any agreement which in
provides for a company to return share capital
to a member is illegal and cannot be enforced,
unless some specific statutory authority
for its return can be found.

The Corporations Act reflects the common law
capital maintenance principal by prohibiting or
regulating certain transactions which could
prejudice a company's capital base to the
detriment of its creditors. Thus the Corporations Act regulates or prohibits:

Share capital reductions (s 256B);

Dividend distributions (s 254T);

The acquisition by a company of its own shares (ss 257A-257J and 259A);

A company taking security over shares in itself or in a company that it controls (s 259B);

The issue or transfer of shares of a company to an entity it controls (ss 259C-259E); and

A company financing the acquisition by any person of its shares or those of its holding company: ss 260A-260D. Capital Maintenance in Australia Today Statutory law reform saw to a relaxed the application capital of maintenance doctrine in some respects but without sacrificing creditor and shareholder protection. The payment of dividend was based on the English system which required that dividend should only be paid out of profit. The application of such a test however was problematic. ‘Profit’ is adequately not defined Section 254T(1) now states a company must not pay a dividend unless:
(a) The company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and
(b) The payment of the dividend is fair and reasonable to the company's shareholders as a whole; and
(c) The payment of the dividend does not materially prejudice the company's ability to pay its creditors. Over time, the long-standing capital maintenance doctrine, on which the current law relating to dividends is based, has fallen out of favour, in part because it has been shown to be ineffective in providing protection for creditors. As a result, various company law changes over time have diminished its scope
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