A company’s capital refers to all the valuable assets it owns and can use to make a profit. In the context of share capital, this refers to the assets, usually cash, the shareholders have transferred to your company in exchange for their shares. Financial capital maintenance is only concerned with the actual funds available at the start and the end of a specified accounting cycle and does not include the value of other capital assets.
It is helpful to look at a hypothetical balance sheet to make sense of how this doctrine works t in practice. This feedback is never shared publicly, we’ll use it to show better contributions to everyone.
- A company achieves capital maintenance when the amount of its capital at the end of a period is unchanged from that at the beginning of the period.
- The Conclusions of the meeting confirmed the status of the Western Balkan countries as potential candidates and emphasised its determination to support the efforts of these countries to move closer to the European Union.
- It is much less important in enterprises in which at least some of the owners have unlimited liability.
- Over the years, there have been some criticisms of the doctrine, particularly with respect to the principal rationale of protecting creditors’ interests.
- First, the statistical analysis revealed that corporate mobility is only a partial reality in the EU.
Nevertheless, once freedom of incorporation and general limited liability were enacted, a new practice was set in motion in Britain. Smaller companies were formed in growing numbers, replacing partnerships, family firms and even sole proprietorships. The article tracks the take-up pattern and changing characteristics of the corporate form in Britain between the enactment of free incorporation and general limited liability (1844–62) and the formal legal recognition of the private company (1907).
Capital Maintenance prevents members withdrawing their capital without restriction
The definition of physical capital maintenance implies that a company only earns a profit if its productive or operating capacity at the end of a period exceeds the capacity at the beginning of the period, excluding any owners’ contributions or distributions. Capital maintenance, also known as capital recovery, is an accounting concept based on the principle that a company’s income should only be recognized after it has fully recovered its costs or its capital has been maintained. A company achieves capital maintenance when the amount of its capital at the end of a period is unchanged from that at the beginning of the period. A high rate of inflation—especially inflation that has occurred over a short period of time—can impact a company’s ability to accurately determine if it has achieved capital maintenance. For this reason, during inflationary times a company may need to adjust the value of its net assets in order to determine if it has achieved capital maintenance.
UK company law has not come to terms with corporate groups and the dangers that they present for creditors.
The 1998 UK Company Law Review Steering Group had noted that, in practice, creditors and potential creditors in modern times no longer regard the size of a company’s issued share capital as a significant factor when considering whether or not to extend credit to it (Payne, 2008a). Thus, these creditors pay much more regard to the company’s financial strength as indicated by its financial ratio, its business prospects, and the overall economic environment within which the company operates (Wee, 2007). Consequently, the purpose of the capital maintenance doctrine has changed from protecting creditors to prohibiting shareholders from taking undue priority in securing their interests. As further explained by Professor David Wishart (1994), in this respect, the rules derived from the principle of capital maintenance performed the useful function of preventing other interests, mainly the shareholders, from taking undue priority. —This article recalls the fact that until the mid-19th century neither company legislation, nor jurists, nor economists, envisioned companies to be private or small.
Noteworthy corporate approvals which can trip up transactions and directors
In fact, the capital maintenance principle has become less relevant nowadays because most companies only have a small issued share capital. Also, there have been arguments that considered the capital maintenance rules as unduly complex, often ill-targeted for their intended purpose, and somewhat overtaken by their exceptions. The maintenance of capital doctrine doctrine of capital maintenance has generated considerable debate in corporate law since its heyday in the late nineteenth century. Capital rules continue to be debated in jurisdictions as diverse as the China and the United Kingdom. It was long assumed that the doctrine protected a company’s creditors and ensured that directors applied the equity capital of the company properly.
Public companies must get court approval for any reduction of capital and allows any member or creditor to object. According to Gullifer and Payne (2015), the primary reasons for the origin of the doctrine can be twofold; firstly, to protect the interest of the creditors, and secondly, to ensure the lawful dissipation of the assets of the company. Therefore, the doctrine aims to protect your company’s creditors, such as its bank lenders and trade suppliers. This essay discusses the relevance and effectiveness of capital maintenance as a legal doctrine, by tracing the case law history of capital maintenance and the problems it attempts to remedy. As a company, you can also reduce share capital, such as if you want to increase your distributable reserves.