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COMMERCIAL LAW[Document subtitle]
Table of ContentsIntroduction......................................................................................................................................1History and Development of Capital Doctrine................................................................................1Conclusion.......................................................................................................................................2References........................................................................................................................................4
IntroductionThe capital doctrine is also known as "capital maintenance doctrine" i.e. it is must for a companyto obtain proper consideration for shares which it issues and after receiving such capital it mustnot repay it to members except in certain circumstances which are enumerated by the corporatestatutes dealing with it. It is a safety measure for creditors to keep the capital of the companyintact as the creditors give credit to the company.History and Development of Capital DoctrineThe doctrine was evolved in company law case of England in “Flitcroft Case” and highlightedtwo important aspects of this doctrine 1) Creditors shall have the right to know that the capital isnot 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 ensurelawful distribution of the assets of the company. “The creditors provide capital on good faith thatthe capital shall be applied in the best interest of the company” (Edwards, 2014). For example, ifa company buys its own share and later goes into liquidation a shareholder can file a suit on thebasis of the amount owed by the company as it is ultra vires for a company to purchase its ownshares 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 anybusiness dealing the company cannot disperse the capital unless and until all the creditors all thecreditors are fully paid.
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