Capital Maintenance Case of Trevor v Whitworth †Free Samples

Question: Discuss about the Capital Maintenance Case of Trevor v Whitworth. Answer: Capital Maintenance Doctrine is not a new concept and it has existed more than a decade. This is a doctrine that was first recognized in the case of Trevor v Whitworth in the year 1887. In this case, the judge argued that it is reasonable for a company to lose money in business transactions, and this is basically because of the risks involved in business (Armour 2000). However, it is not reasonable or acceptable for a company to engage in activities that will lead to a reduction of its capital. This is because it will be against the desire of investors and their reasons of investing in a company, which is capital growth. On this basis, it is possible to assert that the intention of the capital maintenance doctrine is to protect the capital that investors have invested in a company. However, in Ooregum Gold Mining v Roper, the court was of the opinion that capital maintenance doctrine is aimed at preserving and promoting the principle of limited liability (Hannigan 2015). The reasoning of the court is that a shareholder has a limited liability, and it is limited to the extent in the value of his shares. Therefore, reducing the capital of the organization may frustrate the ability of a company to pay off its debts. Moreover, the 2001 Corporation Act supports the doctrine of Capital Maintenance, and this is depicted in section 256A of the Act, which prevents the company from engaging in any activity that may threaten the financial position and stability of the company. Examples of these activities include financing the operations of other companies, engaging in the expensive process of purchasing buyback shares, etc (Borg 2015). In as much as the doctrine of capital maintenance is useful to creditors and shareholders, thelaw allows a company to reduce its capital in some circumstances. For instance, section 254 of the 2001 Corporations Act allows a company to reduce its capital, if it is a decision that is passed unanimously by its shareholders. When a company reduces the value of its capital after getting permission from the shareholders, the process must be transparent and equitable (Hanrahan, Ramsay and Stapledon 2013). Additionally, if the company becomes insolvent because of the reduction of its capital, the directors of the company would be held liable. Therefore, it is their responsibility to ensure that during the process, the value of liabilities does not exceed the value of its capital. Finally, in the case of Fowlers Vocola Manufacturing Company; it is acceptable for a company to reduce the value of its capital, if it seeks to refund investors their capital. References Armour, J., 2000. Share capital and creditor protection: Efficient rules for a modern company law.The ModernLaw Review, pp.355-378. Borg, D.J., 2015. The acquisition of own shares by limited liability companies. Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law. Hannigan, B., 2015.Company law. Oxford University Press,.