Maintenance of Capital Doctrine for Accounting †MyAssignmenthelp

Question: Discuss about theMaintenance of Capital Doctrine for Accounting. Answer: The purpose for the development of the doctrine of capital maintenance is two sided. Firstly, it is intended to safeguard the interest of the creditors of the company. Another reason for the development of the capital maintenance doctrine is to make sure that the assets of the company are properly utilised for the welfare of the company (Lee, 2012). The courts have always tried to ensure that the capital of the company remains unchanged. It is because the creditors invest on the basis of the capital of the company. The company receives credit from the creditors on the belief shown by the company that the assets and the capital of the company would only be utilised for the purpose of the companys business. Thus the creditors keep the expectation that the company would maintain its capital and not distribute them among the creditors. This doctrine has developed in the Flitcrofts case (1882) 21 Ch D. 519. The doctrine has acted as a device to protect the creditors from the misconduct of the shareholders. It also protects the shareholders from the opportunistic behaviour of the parties after the formation of contracts with respect to the capital of the company (Mifsud, 2011). The following doctrine prohibits the company from selling off or disposing the capital to the shareholders unless certain circumstances call for. However this doctrine is more followed by public companies and is rarely followed by private companies. There are exceptions to the doctrine of maintenance of capital. There are certain legal provisions under the Corporations Act 2001 (Cth) which speak of these exceptions. As per section 256B of the Act, the company has the authority to reduce the capital under certain circumstances. It should be fair and reasonable for the shareholders of the company (Arnold, 2017). The company may reduce its capital as long it does not reduce its ability or causes prejudice in terms of its ability to pay the creditors. Moreover it has to be approved by the shareholders of the company. The company an also reduce its capital under section 257B if the company has a buy back procedure. As per section 259A the company can acquire its shares in certain situations. There must be a buy back procedure. As long as the company has not to pay for the acquiring of the fully paid u shares they can do so. According to section 260A, if the company is providing financial help to another entity or person by not prejud icing the payment to creditors, such reduction of capital is justified. References Arnold, A. J. (2017). Capital reduction case law decisions and the development of the capital maintenance doctrine in late-nineteenth-century England. Accounting and Business Research,47(2), 172-190. Lee, P. L. (2012). The Source-of-Strength Doctrine: Revered and Revisited-Part II.Banking LJ,129, 867. Mifsud, Y. L. (2011).Assessing the adequacy and effectiveness of the doctrine of capital maintenance in company law following amendments to the second company law directive(Master's thesis, University of Malta).