Lecture notes
Company Law Lecture Notes and Exam Preparation
Company Law Lecture Notes and Exam Preparation for LAW6036 Includes additional reading for exam preparation
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
Seller
Follow
Content preview
OUTLINE1. What is capital maintenance
○ Rationale ; creditor protection vs business needs
○ Historical development of the doctrine of capital maintenance (Trevor v.
Whitworth [1887])
○ EU Directive
2. Effectiveness in reaching the rationale / goal
○ Varying importance to different creditors & different stakeholders
■ This is most clearly the case as regards mandatory rules rules, which
impose a ‘one size fits all’ approach that is likely to be over-regulatory
■ Importantly, role of creditors
● Unsurprisingly, given this diversity, the appropriate degree to
which creditors should be protected by legal capital rules is a
contentious matter. Just as it is undesirable to offer creditors
too little protection, it may be equally undesirable to mandate
too much protection: that is, to emphasise creditors’ interests
at the expense of other constituencies.
● Moreover, it should be appreciated that the appropriateness of
distribution restrictions—and hence the preferences of
commercial parties—will differ depending on the debtor
company.
○ where a distribution rule is appropriate, it creates a
benefit, and where inappropriate, a cost
■ Relaxation in the CA 2006
● But only in relation to public companies; private cos very much
constrained
○ Rationale for deregulation
○ Attacks on the capital maintenance doctrine
○ Effectiveness in relation to creditors
■ does not protect creditors against a variety of other actions, which a
company might take, that would increase the risks of default
■ Creditors have other options
■ The answer is that such restrictions can deter ex post actions by
shareholders (or, more accurately, directors acting on their behalf),29
which will be inefficient, in the sense of failing to maximise the
expected value of the corporate assets, and which are taken with the
view of transferring wealth, in an expected value sense, from creditors
to shareholders (Jensen and Meckling, 1976). This sort of action will
result in social losses ex post if assets are withdrawn from valuable
projects in order to fund such distributions. This would be priced into
the interest rate by adjusting creditors; hence it is in shareholders’
interests to commit not to do it ex ante (Bradley and Roberts, 2004).
, ■ The result either way would be underinvestment in good projects
(Myers, 1977).
○ Examine whether modern business needs have played a part in the
deregulation of this area of law and recognise that this is particularly so, in the
area of law in relation to the giving of financial assistance
■ Analysis on the difficulties encountered in defining or ascertaining what
exactly would fall within the definition of financial assistance and the
attitude of courts in determining such questions
○ Solvency issue
■ Provided it is solvent yes, but what if it is about to go insolvent…
● Solvency test!
3. Comparison with other jurisdictions (US)
QUESTION 3
‘Paid-up capital may be diminished or lost in the course of a company’s trading; that is a result
which no legislation can prevent; but persons who deal with it and give credit to a limited
company, naturally rely upon the fact that the company is trading with a certain amount of
capital already paid, as well as upon the responsibility of its members for the capital remaining
at call; and they are entitled to assume that no part of the capital which has been paid into the
coffers of the company has been paid out, except in the legitimate course of its business.’
Critically discuss.
The question focuses on the capital maintenance doctrine and the justifications behind it.
A critical discussion requires not just the setting out of the rules but an assessment of the
justifications behind the rules and the value of the present law in this regard. The statement is
taken from the case of Trevor v Whitworth [1887] but recognition of this is not important.
The question requires an examination of (a) the recognition that capital may be diminished or
lost in the course of trading; (b) whether creditors/stakeholders rely on the capital of the
company when trading with the company? Finally (c) whether they are entitled to make the
suggested assumption with regard to the company capital.
Part (c) would require an examination of the circumstances in which the Companies Act 2006
allows capital to be returned to shareholders. However, what is expected is not a general
discussion/setting out of the rules on maintaining capital but rather a reflection of whether
such rules are effective and whether creditors/stakeholders rely on them in making trading
decisions. The rules on capital maintenance, reduction of capital, purchase and redemption of
Company’s own shares and distributions, financial assistance must be discussed, in light of the
statement. The distinction between public and private companies must also be made.
, A good answer will recognise the varying importance of the doctrine to various types of
stakeholders (creditors-involuntary, employees, consumers). A good answer will also
recognise that there have been inroads into the doctrine but there are very few ways in which
capital can be returned to shareholders without considering the risks to creditors. Therefore,
much of what is stated in the statement is a reflection of the current law. A good answer will
also go on to question the assumptions within the statement and whether therefore, the
rules on capital maintenance are justified. This will essentially require reference to academic
commentary. An excellent answer will also incorporate references to why the law has at times
made inroads into the capital maintenance doctrine.
Comment: A popular essay question and many students did well with setting out the capital
maintenance rules. The issue with many answers was the lack of reference to the statement and
in particular, the first two parts of the statement. Therefore, many answers tended to be
descriptive of the rules, with little analysis. A few students have engaged in a discussion of the
capital raising rules, which is unnecessary.
Question 4
The doctrine of capital maintenance is designed to protect the interests of creditors. It is
relaxed in the Companies Act 2006 to accommodate modern business needs and now offers
little protection to creditors.
Discuss critically the above statements in relation to the capital maintenance regime in the
Companies Act 2006.
The question focuses on the rationale of the doctrine of capital maintenance. This rationale
must be examined in light of both business needs and the interests of creditors.
It is expected that students will include within their discussion some detail on the historical
development of the doctrine of capital maintenance (Trevor v. Whitworth [1887]) and will then
examine the statutory provisions in the CA 2006 in relation to the reduction of capital,
distributions, purchase by a company of its own shares, share redemptions and the prohibition
on the provision of financial assistance in public companies.
Excellent answers will move beyond this basic description and examine the rationale for the
deregulation of this area of law especially for private companies. Excellent answers will also
look at the role of creditors in the statutory process, such as whether they have a right to object
at any point of time and why this is so (e.g. the right to object on reduction of capital).
Excellent answers will also examine whether modern business needs have played a part in the
deregulation of this area of law and recognise that this is particularly so, in the area of law in
relation to the giving of financial assistance. There must also be some analysis on the difficulties
encountered in defining or ascertaining what exactly would fall within the definition of financial
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller mjfdzsch. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £20.49. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
62774 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 15 years now