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7.4 Conclusion
The doctrine of capital maintenance has been criticised because it is seen to be
inadequate to protect creditors. This is because the share capital fund raised from
members of the public does not represent the company‟s actual value and ability to
trade. The funds collected have been used to invest in the company‟s assets as well
as the company‟s business operation; thus the funds deemed to protect creditors
merely exist on paper. There is also likelihood that the funds could be lost in trading,
reducing the effectiveness of the doctrine to protect creditors to mere rhetoric.
The duty to preserve the capital fund is not absolute because the law allows for
exceptions, provided the conditions are fulfilled. The law grants protection to
creditors in these situations through stringent procedures and the court acting as
guidance of justice. The existence of exceptions proves that rigid application of
capital maintenance is not possible because it may restrict the company to restructure
or reorganise, for example. In Malaysia, for example, the law provides leeway for a
company to purchase its own shares in order to stabilise share prices which
plummeted significantly due to financial crisis.
This has allowed the solvency concept to penetrate the doctrine of capital
maintenance either through requirement for directors to make a solvency declaration
as in the UK and in Malaysia 98 or, alternatively as in Australia where the court is
required to consider whether the act would not materially prejudice the company‟s
ability to pay its creditors and also impose personal liability on directors if the
company became insolvent under section 588G as a result of the act.
In Malaysia, the importance of this concept to replace the old doctrine of capital
maintenance can be seen from the proposals by the Corporate Law Reform
Committee (CLRC). 99 The CLRC proposed the tests to be applied in section 67A are
98 In Malaysia, the requirement to make a solvency declaration is only applicable in relation to share
buy back.
99 [CLRC Capital Maintenance and Share Capital] above n 57 at [1.4].
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