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7.3.1 Rules Concerning Capital Maintenance
The capital maintenance doctrine relates to the rule which restricts the company from
returning to members, monies which have been received for payment of shares. 30 A
company may not reduce its share capital since it affects shareholders‟ liabilities to
contribute in liquidation, consequently affecting creditors‟ likelihood to be paid. 31
This doctrine raises questions on the freedom of the company to deal with its assets
in terms of distribution to its members as well as the right to reduce the amount of
share capital below the initial amount relied on by creditors. 32 The prohibition may
prevent the company from undertaking any beneficial form of reorganisation which
may benefit shareholders without affecting the interest of creditors. 33 To overcome
this, the company is authorised to reduce its capital subject to conditions laid down
in the statute.
The law generally requires shareholders‟ approval through special resolution. 34 The
amendment in the UK in 2006 removed the requirement of court‟s confirmation in
relation to private limited company, and replaced it with the directors‟ solvency
declaration. 35 Section 256B of the Australian Corporations Act 2001 specifically
provided the reduction should be authorised only if it does not materially prejudice
30 Farrar and Hannigan above n2 at 172.
31 Robert P Austin and Ian M Ramsay Ford’s Principles of Corporations Law (14 th ed., Lexis Nexis
Butterworth, NSW, 2010) at [24-530].
32 Paul L. Davies Gower and Davies‟ Principles of Modern Company Law (8 th ed., Sweet & Maxwell,
London, 2008) at [13-1].
33 Austin and Ramsay above n31 at [24-530].
34 Section 256B(1) of the Australian Corporations Act 2001- shareholders‟ approval subject to
procedures laid down in Part 2J.1 Div 1; section 64(1) of the Malaysian Act 1965; section 641(1)(b)
of the UK Companies Act 2006.
35 See section 641(1)(a) of the UK Companies Act 2006 and see also sections 642-645 of the same
Act.
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