Doctrine of Maintenance of Capital Organization

Question: Discuss about the Doctrine of Maintenance of Capital Organization. Answer: Introduction: This principle has been established under the provisions of the Corporations Act and Common Law to assist the organizations to preserve the capital of their corporation. A corporation should as s result not give away the capital, not to purchase any overvalued asset nor buyback the shares as they diminishes the capital of a organization. Therefore, the preservation of the capital was significant for all the employees who have invested in the organization and to those creditors who have given their money to the corporation on the basis of its financial feasibility. Also, an organization could diminish its capital and provide with financial aid if it abide by with the stringent Process of law. Any such reduction of capital must have the endorsement of the employees and be fully revealed. But, under section 588G the directors of an organization would be personally liable if a reduction of capital or financial assistance leaves the corporation bankrupt. In Trevor v Whitworth (1887) 12 App Cas 409 it was clearly stated that a corporation should not reduce its capital and must maintain it in a good manner. Under section 256A of the Act specifically states that the aim and objective of the rules behind the reduction of capital and buyback was designed to safeguard the interests of the shareholders by: Dealing with the risk of these dealings which leads a corporation to insolvency; Seeking to guarantee equality among the organization and its shareholders; Entailing a corporation to reveal all material data which was necessary. Under section 256B of Act, a corporation may diminish its share capital because it clearly persuades three major requirements. The major requirements in relation to the reduction of share capital states that there: Must be fair and rational reduction of capital towards the shareholders of the organization as a whole; Must not be any requirement regarding the diminution of capital which significantly prejudice the capability of the corporation to pay off its creditors; Must be a approval for the reduction which was expressly provided by shareholders under s 256C. It was also stated that a share for no price which would also be a share capital diminution. But Section 256B does not be appropriate to this diminution. Therefore, a share capital reduction must abide by with section 256B of the Act. The contravention of law would not be an offence and does not invalidate the dealing which was mentioned under section 256D (2) of the Act. But a civil penalty may be applicable under section1317E of the Act which could be made against directors who encourage the reduction of capital. Other share capital reductions would be provided for in sub section 258A 258F of the Act and they may fall outside the requirements of section 256B. These reductions may comprise of: Share capital reduction by unlimited corporations (s 258A) The organization having the privilege to grant a lease or privilege to live in property which belongs to the company. The company which pays the brokerage to an individual in respect of that individual who agrees to take up the shares in the company (s 258C). The key changes to the capital maintenance has been repealed on the grant of monetary aid by private corporations and the new-fangled out of tribunal diminution of capital process for private corporations, were to be incorporated. References Allens Linklaters, Changes To The Dividend Payment Rules, (21 June 2010), https://www.allens.com.au/pubs/cg/focgjun10.htm Brent Van Staden, What your company needs to know about the proposed amendments to the dividend regime, (26 October 2014), https://www.cbp.com.au/publications/2014/october/what-your-company-needs-to-know-about-the-proposed Langton Clarke, Share capital transactionsthe basics, https://www.mcmahonclarke.com/cmsAdmin/uploads/263035_001.pdf Michael Duffy, Submission To Camac On Shareholder Claims Against Insolvent Companies And Implications Of The Sons Of Gwalia Decision, https://www.camac.gov.au/camac/camac.nsf/byheadline/pdfsubmissions_3/$file/mduffy_sog.pdf