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The idea that maintaining share capital would suffice to protect creditors was based
on an assumption that a limited company would have adequate capital to run a
business. 70 However, the emergence of a one-person company makes it is possible
for a company to operate with a small capital and in this situation, the doctrine is
inadequate to protect creditors. 71 Creditors themselves are not mainly concerned with
the level of the company‟s share capital. Their main concern will be the company‟s
ability to pay its debts as and when they fall due.
The creditors‟ concern in the company‟s flow of funds instead of on the level of
share capital caused legislators to shift their focus on the persons who directed the
company. 72 The law has imposed a strict duty on directors to cease trading if the
company is insolvent or will become one as a consequence.
New Zealand abolished the capital maintenance doctrine and replaced it with a
statutory solvency test 73 which must be satisfied when a company enters into
transactions that involve a distribution of funds or property to shareholders. 74 The
rationale for adopting this concept can be found in the decision of Heath J Re DML
Resources (in liq) 75 which is related to the shareholders‟ position as residual
claimants in winding up. 76 Prior to 1993, the insolvency test was applied in Hilton
International Ltd v Hilton 77 in addition to the capital maintenance test.
70 Ibid.
71 Ibid.
72 Austin and Ramsay above n31 at [20-160].
73 The solvency test will be discussed in Chapter 8.
74 Matthew Berkahn and Lindsay Trotman “Equity Finance” in John Farrar (Ed.) “Companies and
Securities Law in New Zealand” (Brookers Ltd, Wellington, 2008) ch 24 at [24.6.3].
75 [2004] 3 NZLR 490.
76 [2004] 3 NZLR 490 at 492; Heath J explained “The Act requires the board of directors of a
company to determine whether it is solvent before returning wealth to its shareholders. As
shareholders stand behind creditors in the priorities in which they are paid on insolvency, it is
inappropriate for a shareholder to receive benefits, ahead of creditors, at a time when the company
is insolvent. The need for a company to be solvent before distributions are made to shareholders is
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