Capital Maintenance Doctrine Strategy

Question: Discuss about the Capital Maintenance Doctrine Strategy. Answer: Introduction: Maintenance of capital doctrine is not an easy task since it has created a lot of debate in the nineteenth century. The doctrine protects company creditors and also ensures that the directors of the company had applied their equity capital properly. Many a times success of this doctrine has been questioned and so as a consequence laws relating to capital doctrine have progressively been reformed. One of the strategy was to link these capital decisions to many kind of tests relating to fairness, solvency and material disclosure to all its shareholders. Earlier in the Australian Government financial system it has been a powerful theme in the context of regular capital of the major banks. So there were lots of concerned raised regarding this doctrine. Hence the final report regarding this issue was released in 2014. As per the report it did not provide privilege of limited liability to the shareholders of various companies. Banks in Australia were benefitting from this approach and so i t was included in the Australian Corporation Law. Capital Doctrine is being considered as an integral part of Australian Corporation Law since it has helped various banks in Australia. The main reason behind this was that it protects the interest of creditors of the company. If a company or a bank becomes bankrupt, it helps the creditors to get the payment first. The Australian Corporations Act, 2001 had adopted this permissive approach which requires solvency, fairness and disclosure issues which is to be satisfied by the directors before these capital decisions are being made. Generally these decisions includes buy back of shares, payment of dividends, reduction in share capital and even the provision of financial assistance to purchase shares. But these decisions are now being subjected to the insolvent trading provisions which are mentioned in 588G of Australian Corporations Act, 2001. If Directors breached while making such decisions then they would be held personally liable and payment should be made by them to the suffered pa rties. From a long time it is decided by courts that Directors are the best person to decide about the best interests of the company so they are the best persons to assess risks facing the company. This is the reason greater reliance is given on their judgement and integrity on such critical related matters. Directors are those persons whose decisions affects the company, its creditors and its shareholders. If any decision taken by the director goes wrong then he is held personally liable for all the consequences. Apart from this there are other provisions as well which would affect directors and its capital related decisions but Australian Corporation Law has mainly focused on Section 588G. Australian Approach towards maintenance of capital doctrine is more advanced than the approach which was followed in U.K after the case of Trevor v Whitworth. These old cases mainly focused on the interests of the creditors while Australian Law focused more on the part of the directors which was mostly in favour of the company. Hence it can be said that the approach opted by the Australian Law were much aggressive and better the approach opted in U.K. Bibliography austlii.edu.au, 2016. CORPORATIONS ACT 2001 - SECT 191. [Online] Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s191.html[Accessed 12th September 2016]. austlii.edu.au, 2016. CORPORATIONS A CT 2001 - SECT 198A. [Online] Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s198a.html[Accessed September September 2016]. austlii.edu.au, 2016. CORPORATIONS ACT 2001 - SECT 250R. [Onlin e] Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s250r.html[Accessed 12th September 2016]. Australian Corporate Law(2017).