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capital maintenance materialise when the court allows distribution to be made out of
current trading profit but prohibit distribution out of capital. 64 The amounts stated as
capital funds are historical figures and the value can depreciate either through
inflation or through trading losses. 65 Companies are not obliged to replace any
trading loss from previous years with profits made in the current years before
declaring dividends. 66 Hence the values of assets could have diminished despite
generating profits in the current year.
7.3.2 Reforms of the Doctrine - A Shift towards a Solvency Test
The doctrine of capital maintenance was developed to balance the effect of limited
liability which was made widely available to any person who wanted to register a
company. The law sought to protect creditors by controlling what a limited liability
company could do with their share capital.
The beneficial effect of restriction upon share capital could be understood in the light
of assumptions in the nineteenth century. 67 The assumption was that a registered
company would be like a deed of settlement company with a large membership. 68 It
was assumed that corporators, when forming new companies, would arrange for a
large number of subscribers for membership to undertake to pay in for shares with a
high issue price, in most cases, much of issue price remained as uncalled capital. 69
64 Ibid; Davies above n32 at 227; Mike Ross Directors’ Liability and Company Solvency: the new
Companies Act (CCH New Zealand, Auckland, 1994) at 6.
65 Len Sealy Cases and Materials in Company Law (7 th ed., Butterworths, London, 2001) at 396, Ross,
ibid.
66 Ross, ibid.
67 Austin and Ramsay above n31 at [20-160].
68 Ibid.
69 Ibid.
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