Capital Doctrine in Corporate Law

The capital doctrine, also known as 'capital maintenance doctrine', is a safety measure for creditors to ensure that a company's capital remains intact. This doctrine originated in England in the 'Flitcroft Case' and has been developed further in Australia through the Corporations Act 2001. The doctrine aims to protect the interests of creditors by preventing companies from repaying their shares or diverting capital for personal gain. In Australia, the approach is more liberal, making directors personally liable for any changes to a company's capital, while in the UK, the focus is on protecting creditor interests.

Commercial law
[Document subtitle]

Table of Contents
Introduction......................................................................................................................................1
History and Development of Capital Doctrine................................................................................1
Conclusion.......................................................................................................................................2
References........................................................................................................................................4

Introduction
The capital doctrine is also known as "capital maintenance doctrine" i.e. it is must for a company
to obtain proper consideration for shares which it issues and after receiving such capital it must
not repay it to members except in certain circumstances which are enumerated by the corporate
statutes dealing with it. It is a safety measure for creditors to keep the capital of the company
intact as the creditors give credit to the company.
History and Development of Capital Doctrine
The doctrine was evolved in company law case of England in “Flitcroft Case” and highlighted
two important aspects of this doctrine 1) Creditors shall have the right to know that the capital is
not dispersed unlawfully 2) the members must not divert the capital to themselves.
The reason for the origination of doctrine is to protect the interest of creditors and to ensure
lawful distribution of the assets of the company. “The creditors provide capital on good faith that
the capital shall be applied in the best interest of the company” (Edwards, 2014). For example, if
a company buys its own share and later goes into liquidation a shareholder can file a suit on the
basis of the amount owed by the company as it is ultra vires for a company to purchase its own
shares as it would amount to a reduction of capital.
It can be very well understood that on winding up of the company or in its liquidation or in any
business dealing the company cannot disperse the capital unless and until all the creditors all the
creditors are fully paid.

Capital Doctrine in Australia
The principal statute dealing with Corporate Law in Australia is the “Australian Corporations
Act 2001” and provisions relating to capital maintenance doctrine are to be found in Chapter 2J
of the Corporations Act 2001 (Goode, R.2015). It provides following kinds of transactions which
can affect the capital composition of a company:
 Where company buy backs its share.
 Control and self-acquisition of shares.
 Any financial assistance by a company.
 Restriction on the payment of dividends.
The Capital Doctrine approach is more liberal in Australia as it makes the Directors of the
company personally liable and not makes the act of company ultra vires (Ng, E. 2017). There is a
duty of the director to restrict from trading if there are reasonable grounds to believe that
company is insolvent. The modernized approach is contrary to other orthodox laws and allows a
reduction in share capital as per the provisions of Corporations Act. The reduction should be
reasonable and not biased, and reduction should not suit to any particular class say, shareholders,
it should be as per the statute.
Conclusion
“Australian approach is wider than the UK approach developed under the Trevor v Whitworth
which prima facie focusses on the protection of the interest of the creditors." Modern business
environments force business to take corporate risks which involve capital issues as well. The
companies can make capital changes but at the same time makes the director of the company
liable so that this liberal approach is not used to divulge the company's capital.

References
Edwards, L. H. (2014). Legal Writing: Process, Analysis, and Organization. Aspen Law & Bus..
Goode, R., Kronke, H., & McKendrick, E. (2015). Transnational commercial law. Oxford
University Press,.
Ng, E. (2017). Feeding the Minotaur: Is International Commercial Arbitration Hindering the
Development of Commercial Law?. Asian Dispute Review, 19(1), 22-28.