View/Open - Research Commons - The University of Waikato

CHAPTER 7: A CONCEPTUAL ANALYSIS OF CAPITAL AND
7.1 Introduction
CORPORATION
This chapter will explore the relationship between share capital and creditors‟
protection and the concept of the corporation. The relationship between a company
and its creditors has changed from personal to impersonal with the evolution of
companies from partnership to joint stock companies to the existing structures.
Hence, creditors are relying on the company‟s share capital as the benchmark of the
company‟s capability to make loan repayments. To this extent, the capital is the
corporation, as Jessel MR recognised in Re Exchange Banking Co, Flitcroft’s Case 1
The chapter will be arranged in two sections: the first section will examine the
definitions of share capital and the effects of companies‟ evolution on share capital
and creditors; the second section will briefly examine the common law doctrine of
capital maintenance as well as statutory provisions which aim to provide a cushion
against creditors‟ claims. The section will also investigate the extent to which
protection is accorded to creditors by the doctrine, as well as the weaknesses of the
law in this area. It will also identify any differences in the laws in the UK, New
Zealand, Australia and Malaysia.
7.2 Definition of Capital
The term „capital‟ originally referred to loans of money and later expanded to
include other assets. These funds were the used to engage in the company‟s trade. 2
1 (1882) 21 ChD 519.
2 John Farrar and Brenda Hannigan Farrar’s Company Law (4th ed., Butterworths, London 1998) at
155.
151