Critique of Capital Maintenance in Private Company Law

This essay critically examines the doctrine of capital maintenance within the context of current regulatory frameworks applicable to private companies. It begins with an introduction to business organization law and the significance of capital maintenance in protecting creditors. The main body of the essay delves into the doctrine's principles, identifying key aspects such as the protection of share capital and its role in safeguarding creditor interests. It explores the rules governing capital maintenance, including the restrictions on returning capital to shareholders and the amendments allowing private companies to reduce share capital through special resolutions. The essay applies the doctrine through case studies, such as Salomon v Salomon and Trevor v Whitworth, illustrating how the doctrine operates in practice and its limitations. It further analyzes arguments regarding the doctrine's effectiveness, considering the balance between shareholder and creditor interests and the impact of recent legal changes. The conclusion summarizes the findings, emphasizing the ongoing relevance of the doctrine and its evolution within the legal landscape. The essay highlights the importance of capital maintenance in ensuring the financial stability of companies and the protection of stakeholders.

Law of Business
Organisations

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Critically discuss the doctrine of capital maintenance within the current regulatory framework
that relates to private companies............................................................................................3
Identify...................................................................................................................................3
Rules.......................................................................................................................................4
Apply......................................................................................................................................4
Argument................................................................................................................................5
CONCLUSION................................................................................................................................7
Reference.........................................................................................................................................9
Books and journals.................................................................................................................9

INTRODUCTION
Business organisation law refers to the several ways of business which is being involved in the
legal forms under the state law. Business may be of various types such as partnership, separate
legal entity, sole proprietorship, limited liability partnerships etc. most of the business
organisation are set with the different taxa nd liabilities. They have their own benefits and
drawbacks and also, they have to face many of the factors which can affect their business
(Biygautane, and et.al., 2020). The doctrine of fundamental maintenance is referring to the
principle which in the corporate law. The major objectives of this principle are to provide
protection to the creditors of the company. The share capital of the company is provided to the
creditors to provide protection to them. This report covers an essay which consist of the
discussion of the doctrine of capital maintains with the today’s regulatory framework that can be
related to the current private companies.
MAIN BODY
Critically discuss the doctrine of capital maintenance within the current regulatory framework
that relates to private companies.
The doctrine of capital maintains is the fundamental principle in the corporate law. The major
objective and aim of this principal are that to provide protection to the creditors. Company share
capital is protected to provide protection to the creditors of the company and business. At
previous, the capital was raised by the company in order to pay the debt of the assets, carrying of
the business activities a discharging liability of the business and lastly for the repayments of the
creditors. But now the doctrine principle says that the share capital will be for the protection of
creditors (Di Bucchianico, 2020). This is considered as a central principle which is fixed in the
English Law and has legislated in the Company Act 1958 but now it has changes up to the
Company act 2006 that embedded in original doctrine.
Identify
The key subject that is directly ascertain if the owner of a company’s can be personally
accountable for the negligent actions when taking actions relative to the employed in the
company and also, they should summary the circumstances under which it is allowable. In
addition, it is also discussed that if the share holds will also be liable for negligent actions under
the company name (Shin, 2019). There are various types of business which consist of several

forms of business structure. These are partnerships, separate legal entity, sole proprietorships and
limited liability partnerships. As in the case of separate legal entity, company is separated from
the owners and shareholders. The doctrine of capital maintenance is most essential for the
collection of rules that re designed to make sure company obtains the capital which it has raises,
and the capital is maintained, for the benefits of the creditors and discharger of the liabilities
(Glassmann, and Filsinger, 2021). This principle prevents the return of capital which can be
directly or indirectly to the shareholders after the winding up of company.
Rules
The main reason why company engage in the activities of busines is to earn a profits and
revenues. However, most of the companies are financed so they are not running but by the
creditors and shareholders. Companies and business cannot run with a limited capital amount. As
for starting and running a business the owner needs huge amount of capital. So, for that owner
raise capital from shareholders, they serve and raise finance to the company for operating their
business activities. For that creditors and shareholders both needs assurance that their
investments are on the right way and they will get return on investment after some time. In the
recent times, the portion of company act has changes some of the amendments that company can
diminish their share capital without going to the court. This is only a situation for private
companies as they can be able to do this via special resolutions which can be supported by all the
directors. This will allow private businesses to decrease their share capital in such a way that was
previously allowed by the unlimited liability companies. Shareholders prefers that there are
being paid from the business casket of what gets and on the other hand, creditors ensure safety
from their own investments (Leckel, Veilleux, and Dana, 2020). However, this doctrine
restricted the companies to return their funds of the shareholders which was initially used for
shares.
Apply
Let us take an example of a law case which is Salomon v Salomon and company. As in this case
the outstanding liabilities of the company cannot be settled at the time of liquidation of personal
assets of the shareholders because there are two separate legal entity. According to this case,
Salomon was a shoe business man which is considered to be a sole proprietor’s business. Then
Salomon sons wanted to stake in the business, so he opened a new company for them which was
named at A. Salomon and company limited. In this company more than 99% of the shares are

taken by Mr Salomon and each of his son is getting 1 share. Then later on this company
purchases show business of Mr. Salomon by paying premium to the market. Then Salomon
provide some debt to the company for which debentures are being issued. Then later, his
business received orders from government and company had to face difficulty of finance when
government decided to diversify suppliers. As a result, company has to face certain loss and it
becomes worst and also it is unable to pay debt to its creditors. Before at the time of Bankruptcy,
Salomon was able to sell the debentures. At that time, the creditors argued to the owner that they
are using company as a means of liability and thus demand him to settle the unsettled creditors
(Maitre-Ekern, 2021). However, it was a separate legal entity company from the owner and it is
the responsibility of shareholders to settle outstanding liabilities of the company, this is not
lawfully binding on the shareholders.
So, clearly the above protection is protracted by the company structure, can possibly be
ill-treated by many unprincipled agents who may register a company for showing fake actions.
To address this issue, the doctrine of capital maintains has been introduced in which creditors are
being protected by the capital of the company. In this case, court removes the protection offered
by company structure to indicate true controller.
There is one of another case studies which is relevant in this case is Trevor v Whitworth, this is
one of important and populated case of company law. As in this circumstance company
repurchase the share which are quarter of their own share so at the time of liquidation of the
business, one of shareholder make request that the equilibrium of continued be transported to
him in lieu. This practise is forbidden for the business and they are trying to make efforts for
dipping share capital through the segment of buy- back. Same as company cannot reduce the
market value that is said in Aveling Barford limited v Perion limited. this both Aveling Barford
and Perion belong to one person. In this case of conducting a business, the owner cannot able to
make distribution of the shareholders of Aveling Barford (Meister, 2021). Aveling was offered
by the owner while transmitting its possessions to the Perion at under value. Then the court make
judgments in favour of the receiver while reproachful the behaviour of the previous owner. This
constraint was taken to defend interest of the company creditors.
Argument
In addition, constitutional rule on delivery authorises companies to provides distribution only
when they consult with the company directors, and the thought will be made for whether or not

to make distribution. The statutory role under doctrine of capital maintenance is that it is
unlawful for the company to execute for a distribution of the capital. In addition, it is stated that
carrying out these distributions will not affect the operation of busines and their business
activities. In recent study, it is elaborated that court play a role in reducing the share capital of
the company. There might be many reasons for the company to decrease their share capital but
one of the reasons which is related with the company is that its delivery to the shareholders but
lacks fallback to execute it. For these reasons, company has to decide to reduce to cancel its
capital or reserves (Peda, and Vinnari, 2020). It is noted that previously, doctrine of capital
maintenance, it is experiential that court needed explanation for the shareholders and safety of
creditors. However, after the alterations of doctrine the companies are allowed to be reduce their
share capital if they want. It is done to solve the ability of a company and to meet its long-term
requirements and accomplishments of the long-term growth and opportunities. With this
amendment of doctrine of capital maintenance, directors are agreeing to set out there provision
according to the Act. But it is argued that of a company is unable to discharge its duties by
meeting their liabilities, or reducing share capital, or distributing from the capital rather than
from profits, so the company creditors are almost to get risks.
So, in this essence, the doctrine of capital maintenance is proved to be unfit for the protecting of
the creditors (The Doctrine Of Capital Maintenance Law Company, 2020). As in the case of
Aveling Barford v Perion limited, in this intergroup company was sold off at the time of
liquidation and also there is a value reduced. In addition, also casting doubt on the creditors
protection pale in the business is the non-obligation of surveyor’s cross inspection of the
creditworthiness declaration. In this, even the directors of the company are playing games with
the shareholders’ funds, and also there is no way of verifying these which cast on the
protectiveness of the creditor’s nature of doctrine of capital maintenance. In further, statutory
right are settled with the unlimited companies. In recent it is noticed that these are the companies
which are under the doctrine of capital maintenance for reducing their share capital. Later on, it
so claimed that this policy cannot serve the purpose for which it is s meant for. For this it is
important to know what a share capital means for. It is a nominal value of shares that belong to
shareholders (Renne, and et.al., 2020). At the time when company issue shares to the
shareholders then the face value of the shares issued are known as share capital. It is clarifying
that shares which are repurchased and cashed by the company and kept aside are not included in

the share capital. Based on this, if company reduces its share capital then shareholders must have
to worry for their safety of their investments. Based on this amendment od doctrine of capital
maintenance, this is exploited by the directors of the companies as they expose their creditors ae
in risk of funds.
The principle of this doctrine is stated by the House of Lords in Trevor v Whitworths, ana this is
applied to both by the court. The main objective of this rules is stated that it always works on the
protection of the creditors who thinks that there are in loss or risks from the company operations.
This rule is situated in the English law. These case laws are the foundation of doctrine of capital
maintain ace. But the UK position is modified into the relaxed one with due to requirements of
today’s business demands and supply (Takao, 2020). In UK, the role of this doctrine of capital
maintenance it was reformed in the year 1980and it is replaced with the procedure of statutory so
that the shares can be redeemable and bought back under the Companies Act 2006. Doctrine is
having certain general consequences which can be exceptional applied by the legalisations of the
national. These legislations are first is company cannot purchase its own shares unless it follows
a rule regarding maintained in the acts. Then next is a Subsidiary company cannot a member of a
holding company. Then another legislation is that it is unlawful for the company to provide any
kind of financial assistance at the time of acquisition by any person of its shares or those of its
holding company. Then next is dividends of the company’s should not be paid to the
shareholders expect out of profits which are to be distributed. Then last is when any public
company suffering from serious los of capital then there is a meeting of a company which is
called a discussion of the issue.
Some of the expectations of this fundamental principle is that if the law allows then company can
reduce its share capital with the consent of court. Then another exception of this law is that a
company might be redeem it shares if the Acts allows it (Wontner, and et.al., 2020). Next is
company may purchase its own shares which are being prescribed by the law and the last is that
capital may be returned to the members of the company a shareholder of the company after the
debts have been paid at the time of winding up of the company and business.
CONCLUSION
From the above report it is concluded that doctrine of capital maintenance is the relevant
principle which can help the creditors in protecting them from share capital of the business. this
law is in the favour of creditors as to protect them against any of the exploitation. As in the

above case studies it is stated that creditors are being given to their shares and results in
providing and protecting them from the overall loss at the time of winding of a company.
However, it is noticed that by dipping share capital of the company, funds of the investigator will
be very highs if the principle of the share capital maintenance is served to the purpose,
companies should discharge their liabilities without having reducing their share capital.

Reference
Books and journals
Biygautane, M and et.al., 2020. In the land of sand and oil: How the macrofoundations of a tribal
society shape the implementation of public–private partnerships. In Macrofoundations:
Exploring the institutionally situated nature of activity. Emerald Publishing Limited.
Di Bucchianico, S., 2020. A note on Krugman’s liquidity trap and monetary policy at the zero
lower bound. Review of Political Economy, 32(1), pp.99-120.
Glassmann, U. and Filsinger, M., 2021. Varieties of Private Household Debt in Europe:
Incompatibility of Culturally Diverse Lending Regimes Between Germany and
Italy?. German Politics, pp.1-23.
Leckel, A., Veilleux, S. and Dana, L.P., 2020. Local open innovation: a means for public policy
to increase collaboration for innovation in SMEs. Technological Forecasting and Social
Change, 153, p.119891.
Maitre-Ekern, E., 2021. Re-thinking producer responsibility for a sustainable circular economy
from extended producer responsibility to pre-market producer responsibility. Journal of
Cleaner Production, 286, p.125454.
Meister, R., 2021. Justice is an option: A democratic theory of finance for the twenty-first
century. University of Chicago Press.
Peda, P. and Vinnari, E., 2020. The discursive legitimation of profit in public-private service
delivery. Critical Perspectives on Accounting, 69, p.102088.
Renne, J and et.al., 2020. Emergence of resilience as a framework for state Departments of
Transportation (DOTs) in the United States. Transportation Research Part D:
Transport and Environment, 82, p.102178.
Takao, Y., 2020. Low-carbon leadership: Harnessing policy studies to analyse local mayors and
renewable energy transitions in three Japanese cities. Energy Research & Social
Science, 69, p.101708.
Wontner, K.L and et.al., 2020. Maximising “Community Benefits” in public procurement:
tensions and trade-offs. International Journal of Operations & Production
Management.
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