The company and Its

Capital
Group IV
Sainaj Timalsina (15035)
Deepika Acharya(15001)
Pranjal Neuapne(15025)
Karun Pandey(15026)
Samish Dhakal(15011)
Rajpal KC(15014)
Doctrine of Capital Maintenance

By: Sainaj Timalsina

 Doctrine of capital
maintenance
Capital maintenance is the concept that states that a
profit should not be recognized unless a business has at
least maintained the amount of its net assets.
The doctrine of capital maintenance which means a
company must receive proper consideration for shares
that it issues and that having received such capital it
must not repay it to members.
It emphasizes on fundamental duty of companies to
keep the capital intact for the safety of the creditors
giving mandate to the courts to supervise whether the
capital is dissipated lawfully or not.
Any reduction of capital can decrease the
liability of members and consequently the
position of the creditors can be vulnerable.
This doctrine holds the legal rules in different
areas like payment of dividends or other
distribution to shareholder, reduction of
company's share capital or reserves and a
companys redemption or purchase of its own
shares.
It is a fundamental principal of company law that the
share capital must be maintained. Without adoption
of a special procedure a company cannot return its
capital to its shareholders.
It states that if a transaction amounts to an
unauthorized return of capital then it is ultra vires.
 The doctrine has the following
consequence's :
1. A company cannot purchase its own shares unless it
follows the strict procedure laid down by the act.

2. A subsidiary company must not be a member of its

holding company.

3. Dividends must not be paid to the shareholders expect

out of distributable profit.

4.If a public company suffers loss of capital, a meeting of

the company can be called to discuss the issue.
 Exceptions
If the law permits, a company may reduce its share
capital with the consent of the court.

A company may redeem its shares if the act allows.

A company may purchase its own shares under a

procedure prescribed by the law.

Capital may be returned to the members after the debts

of the company have been paid in winding up.
Evolution and Logic of Doctrine of Capital
Maintenance
By: Deepika Acharya
15th Nov, 2017
 Evolution of the Doctrine of CM
Case Laws during judicial interpretation
3 leading cases
1. Trevor v Whitworth (1887)
2. Flitcrofts case (1882)
3. Aveling Barford Ltd v Perion Ltd (1989)
 Trevor v Whitworth(1887)
Parties: Appellants: Trevor
Respondents: Whitworth

Facts: The MOA of the company(James Schofield & Sons Limited) didnt authorize to
purchase its own shares. Whitworth sold his shares to the company(1880).. He was left to
pay . The company went into liquidation (1884). Trevor was the liquidator of the company
.Then Whitworth filed the case. The court of appeal said decided Trevor to pay. Then Trevor
appealed.

Issue: Whether the company could purchase its own shares?

Decision (House of Lords):The company acted outside its power. The purchase of its own
shares was deemed void and Whitworth claim for the balance failed.

Rationale: The capital of limited liability companies should be maintained to satisfy creditor
claims. Creditors assume risk in their outlay and law ranks them ahead of shareholders when
capital is returned.
Developed Rule: Company is generally prohibited to reduce its share capital because it will
prejudice the interests and rights of creditors.
 Flit crofts case( Re Exchange Banking
Company) (1882)
Parties:
Claimant: Liquidator
Respondent: Directors
Facts: The directors showed profit of the company and proposed for dividends even the
company had bad debts and wasnt at profit. General meeting of shareholders declared
dividends When the company went into liquidation, the liquidator sought an order that the
directors should refund the entire amount of the dividends.

Issue: Whether the dividends could be given without profit?

Decision: The directors were liable not only to pay back the dividends which they had
received, but also to refund the company in respect of the dividends which they had paid to
the other shareholders.
As Cotton LJ put it: directors are in the position of trustees, and are liable not only for what
they put into their own pockets, but for what they in breach of trust pay to others.

Rationale: Distributing dividends out of profit is unlawful regardless of whether directors

were acting in good faith or not.

Developed rule: Dividends are distributed out of profit only.

 Aveling Barford Ltd v Period Ltd (1989)
Parties:
Claimant: Aveling Barford Ltd
Respondent: Perion Ltd

Facts: Mr Lee controlled and owned both Aveling Barford ltd and Perion ltd. Perion ltd was a
trust company for the benefit of Lees family. Aveling Barford wasnt able to earn profits so
it sold some of its assets to Perion at undervalue. Perion Ltd later sold the assets to other
company in a profit violating the agreement not to resale it. Aveling ltd went into liquidation.
The Liquidator of Aveling Barford filed the case claiming that Perion wasnt acting as
constructive trustee.

Issue: Whether the company would sell its assets at an unprofitable state?

Decision: The main claim of Aveling Barford ltd wasnt addressed. The court held the
company can't reduce its capital and the directors of Aveling Ltd werent supposed to do it.
It seemed like dressed up distribution". The transaction was held to be void as an
unauthorized return of capital.

Rationale: It would fraud the creditors of Aveling Barford Ltd.

Developed Rule: The company can't reduce its capital.

 Logic for the Doctrine of CM

1. To protect the interest of the creditors

2. To ensure the lawful dissipation of the assets
of the company
 How are creditors protected?
1. The creditors has right to say that the corporation
shall keep its capital and not return to its
shareholders.
2. Provisioned in company act where there are
different rules at which creditors are always at
advantage.
Rules of capital maintenance

Pranjal Neupane
 Minimum capital requirement
The minimum capital requirement for
registration of a public company is Rupees 10
million.
Such requirement is not applied in the case of
private company.
Section 11 of the Company act states The
paid up capital of a public company shall be a
minimum of ten million rupees, except as
provided in the in the prevailing law.
 Reduction of Share Capital
A company cannot simply reduce its share capital except in
accordance with section 57 and 58 of the act.
Section 57(1) of the act requires adopting a special resolution
regarding reduction of share capital at its general meeting and
obtaining approval of the court.
(2) After obtaining the approval of the court, the company may
reduce its share capital as follows:
a. By reducing the capital to such amount as has been paid up where
calls for payment of amount on shares are not fully paid.
b. Paying back any paid up share capital
c. Devaluating the face value of shares where the company has
sustained a big loss or suffered a natural calamity.
 Procedures for obtaining approval of
court to reduce share capital (Section
1. Special resolution for reducing share capital and a
petition to the court for58)
an order confirming the
reduction.(Subsection 1)
2. Publishing a public notice in a daily newspaper of
national circulation at least three times before the
hearing, stating the venue and date of hearing.(2)
3. Every person entitled to a debt/claim be entitled to
submit claims and objection to the reduction of share
capital of the company.(3)
4. Submission of real and true list of creditors of the
company to the court by the director or company
secretary.(4)
 Continue
5. If the company admits the full amount of debts or claims made by
creditors and agrees to make provision of moneys required to pay such amount
the court may issue order confirming reduction. (5)
6. If any false statement or omission is found in the list of creditors submitted to
court, the director who submits such list and the officer who signs such list shall
be liable to punishment. (7) and (12)
7. The court may make the order for the reduction of share capital if it is
satisfied that the creditors consent to the reduction have been obtained or their
debts have been discharged or have been secured. The court may specify
appropriate terms and conditions. (8)
8. Such order of court shall be deemed to have ipso facto been incorporated in
the MOA and AOA. (11)
9. When the share capital reduction is authorized, the director or company
secretary shall mention and authenticate that matter in each certificate issued
by the company.
 Distribution of dividend is only out of
profits
S 182 (5) states that A company shall not pay or
distribute a dividend in any other manner except out of
the amounts of profits set aside for the distribution of
dividend.
A company shall fully deduct the pre operation
expenses, any amount required to be paid or set aside
out of the profits under the prevailing law, the amount
required to be depreciated, the amount of
accumulated loss in previous financial years before
paying or declaring dividends out of profits. (6)
 Allotting of shares at a discount
A company cannot issue or sell its shares at discount
except in following conditions:
1. Issuing shares pursuant to a capital restructuring
scheme of the company.
2. Converting loans borrowed by the company into
shares with the consent of the creditors.
3. Issuing shares pursuant to an employee share scheme.
4. Other conditions/purposes as approved by the office.
Section 64
 Valuation of assets used to purchase
shares
If shares are issued to any person or promoter for
non- cash assets in the case of public company
such assets must be valuated by certified
engineer or accountant. (Section 18(3))
The criteria for valuation shall be as prescribed
and if such criteria are not prescribed the person
evaluating such property shall mention the
criteria. (S18(4))
 Financial Assistance to buy its own
shares
Section 62 prohibits a company from
providing any loan or financial assistance to
any person for purchasing its own shares or
the shares of its holding company.
However, a company can provide loans to any
employees of the company to purchase the
fully paid up shares of that company under a
scheme of selling shares to its employees.
 Right to pre-emption
Section 56(8) The existing shareholder shall
have the first right to subscribe to the new
allotment of shares.
A time limit of at least thirty five days shall be
given to the existing shareholders to subscribe
the shares. (Section 56(11))
 Prohibition on purchase by company
of its own shares
Section 61 of the Companies act prevents
company from purchasing its own shares.
However the company can buy back its own
shares out of its free reserves available for being
distributed as dividends in circumstances such as:
1. If Shares issued by the company are fully paid up.
2. Buy back of shares is authorized by the AOA of
the company.
3. Adoption of the special resolution at the general
meeting authorizing the buy back.
 Charge Enforceable
For a charge to be enforceable, it must be
recognized and enforceable under the
Companies Act. For example Lien on shares
The Companies Act,1994
(Bangladesh)
KARUN PANDEY
 Contemporary Statutory law
Governing the Doctrine of Capital
Maintenance
1) Financial assistance:
58 (2) : No company limited by shares other than private
company or a subsidiary company of a public company,
shall give whether directly or indirectly, and whether by
means of a loan guarantee the provision of security or
otherwise any financial assistance for the purpose of or in
connection with a purchase made or to be made by any
person of any shares in the company:

Provided that nothing in this section shall, where the lending

of money is part of the ordinary business of a company, be
taken to prohibit the lending of money by the company in
the ordinary course of its business.
2)Purchase of own share: A company limited by
shares is not generally entitled to buy its own
shares unless they follow the proper
procedure of it prescribed under the
provisions of the Companies Act, 1994.
However, a company can buy its own shares
out of its profit capital as per the Companies
Act, 1994.
58) Restriction on purchase by company or loans by Company
for purchase of its own shares
No company limited by shares shall have power to buy its
own shares or the shares of a public company of which it is
a subsidiary company, unless the consequent reduction of
capital is effected and sanctioned in the manner provided
by sections 59 to 70.

If a company acts in contravention of this section, the

company, are every officer of the company who is
knowingly and willfully in default shall be liable to a fine not
exceeding five thousand taka.
4)Reduction of Capital: Every creditor shall be
entitled to bring objection to the court against
that reduction. The Court if satisfied with respect
to every creditor of the company who under this
Act is entitled to object to the reduction, that
either consent to the reduction has been
obtained or his debt or claim has been discharged
or has been determined or has been secured may
make an order confirming the reduction on such
terms and conditions as it thinks
59. Reduction of share capital.
(1) Subject to confirmation by the Court, a company limited by shares, if so authorised
by its articles, may by special resolution reduce its share capital in any way, and in
particular the company may, as part of this general power--
(a) extinguish or reduce the liability on any of its shares in respect of share capital not
paid-up;
(b) either with or without extinguishing or reducing liability on any of its shares, cancel
any paid-up share capital which is lost or presented by available assets;
(c) either with or without extinguishing or reducing liability on any of its shares, pay
off any paid-up share capital which is in excess of the wants of the company;
(d) so far as is necessary, alter its memorandum by reducing the amount of its share
capital and of its shares accordingly.
(2) A special resolution under this section is in this Act called a resolution or reducing
share capital.
4) DIVIDEND
No dividend shall be paid otherwise than out of
profits of the year or any other undistributed
profits.

pay dividend in proportion to the amount paid-

up on each share where a larger amount is paid-
up on some shares than on others. sec52 (iii)
 SINGAPORE
The Companies (Amendment) Act 2005 has
reformed the law of Singapore on capital
maintenance substantially. It has, inter alia,
enabled a company that satisfies the requisite
solvency tests to reduce capital, engage in
financial assistance and share buyback. It is
argued that whilst the reforms have reduced
compliance costs, the failure to bring the
solvency-based reforms to their logical conclusion
has made Singapore laws on capital maintenance
incoherent.
Capital Maintenance in India and England
Samish Dhakal
15011
 Capital Maintenance(India):
Indian Company Act 1956 deals vehemently with the
doctrine of capital maintenance.
It has been observed that when a company purchases
back its shares out of free reserves, then it will amount
to reduction of capital.
To prevent this reduction , Sec 69 has been enacted
which says that when a company purchases its own
shares out of free reserves, then a sum equal to the
nominal value of the shares so purchased shall be
transferred to the capital redemption reserve account
and details of such transfer shall be disclosed in the
balance sheet.
 A limited company is also authorized to issue preference
shares and whenever these shares are redeemed, it
amounts to reduction of capital, but section 80 of the Act
says that the redemption of preference shares should only
be made out of the profits of the company available for the
distribution as dividend or from the fresh issue of capital.
If the preference shares are redeemed from any other
source the company must build up a capital redemption
reserve account.
This provision is there to support the fundamental
principle that the capital of the company must be
maintained.
 if a company fails to make profit but to maintain goodwill decides to
distribute dividend, it will certainly reduce its share capital.
Section 205 of the Act lays down the prohibition on such
distribution as it says that a dividend (including interim dividend)
can be paid out of current profits or profits accumulated of earlier
years.
for this purpose the Board meets to decide how much amount need
to be transferred to the reserves as per the Act.23
Through this manner capital in the reserve account is always
maintained and the company is not allowed to touch this capital.
Hence it helps in the protection of the creditors.
 But the Act also provides some provisions
which show a departure from the above
stringent guidelines.
As per the sections 100-105 of the Act a
company is allowed to reduce its share capital
depending upon the special resolution and
the courts order.
 Capital maintenance(England):
In England, the Companies Act 2006 makes a
number of important changes to the rules
relating to capital maintenance and, in line
with the deregulatory objectives of the Act, a
number of the statutory requirements in this
regard have been relaxed.
 Distributions:

A company may only make a distribution out of profits available for

the purpose by reference to relevant accounts.
(The relevant accounts are the companys last annual accounts.)
A public company may only make a distribution
(a) if the amount of its net assets is not less than the aggregate of
its called up share capital and undistributable reserves, and
(b) if, and to the extent that, the distribution does not reduce the
amount of those assets to less than that aggregate.
For this purpose a companys net assets means the
aggregate of the companys assets less the aggregate of its liabilities.
 Reduction of share capital
The Company Act 2006 introduces a new
procedure for private companies to be able to
reduce their share capital by a special resolution
supported by a solvency statement given by all
the directors.
This new procedure does not require court
approval of the reduction and introduces ability
for the private company concerned to reduce its
capital in any way which was previously only
possible if the company was an unlimited
company.
 Financial Assistance
Where a person is acquiring or proposing to acquire shares
in a private company, it is not lawful for that company, or a
company that is a subsidiary of that company, to give
financial assistance directly or indirectly for the purpose of
the acquisition of shares.
In particular, with effect from 1 October 2008, the rules on
unlawful financial assistance will no longer apply to private
companies (in most circumstances) and private companies
will also be allowed to reduce their share capital without
the need to go to court.
 However, it does not prohibit a company from giving
financial assistance for the acquisition of shares in its
holding company if
(a) the companys principal purpose in giving the assistance is
not to give it for the purpose of any such acquisition, or
b) and the assistance is given in good faith in the interests of
the company in accordance with section 172 of the CA 2006.
and the transaction must not breach the rules on
distributions or otherwise constitute an illegal reduction in
the capital of the company.

Sec 172 Duty to promote the success of the company for the
benefit of its members.
 Purchase of Own Shares
The general rule is that a limited company may
not acquire its own shares by purchase,
subscription or otherwise, except as permitted.
Part 18 CA 2006 brings together the current
methods by which a limited company can acquire
its own shares and section 658 CA 2006 prohibits
the acquisition by a limited company of its own
shares except in accordance with the provisions
of that Part.
 One advantage of a company reducing its share capital by
purchasing its own shares is that the purchase price for the
shares concerned may exceed the amount of capital that
those shares represent.
The key changes to the capital maintenance rules
introduced by the CA 2006, being the repeal of the
statutory prohibition on the giving of financial assistance by
private companies and the new out of court reduction of
capital procedure for private companies, are to be
welcomed. Whilst it will be interesting to see how market
practice develops in relation to the new out of court
reduction procedure available to private companies, the
changes should simplify many transactions, shorten
transaction timetables and reduce costs.
Provisions In U.S & Conclusion
By :Rajpal K.C
 In U.S
There are no rules prohibiting limited
companies from buying self owned shares.
Companies are generally free to reduce their
share capital without the consent of the
Court.
So, we can say that The Doctrine of Capital
Maintenance doesnt apply in U.S.
 Conclusion

A limited company should be specifically prohibited from

reducing its capital and from purchasing its own shares
The procedure for the reduction of capital must be designed to
protect both creditors and shareholders.
Thus doctrine of capital maintenance always protects the
interest of creditors prior to shareholders. And this makes
creditors secured and invest more.
To sum up, national law should be designed in such a way that
company rise its capital and make no returns to its shareholders
unless net assets are retained which equals or exceed the value
of that capital