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creditors have equal bargaining power to that of the company. While this may be true
with regard to some creditors such as financial institutions, others are as vulnerable as the
shareholders. 41 So company law has to be adjusted to accept the notion and to take into
account creditors‟ interests in a situation of doubtful solvency that is likely to be achieved
if the courts are prepared to accept a more interventionist role to review directors‟
commercial and policy decisions. 42
3.4 Doctrine of Capital Maintenance and the Solvency Test
The capital maintenance doctrine relies on the capital contributed by shareholders as a
buffer to protect creditors. The doctrine, however, does not provide a guarantee that the
company will be solvent throughout its life because the law acknowledges the
vicissitudes of business. 43 Creditors have the right to expect that the company will not
reduce or return the assets while the company is a going concern, except in the form of
dividend payable out of the profits. 44 The basis of the expectation was that creditors gave
credit to the company on the faith of the representation that the capital would be utilized
for the purpose of the business. 45
The doctrine has been slowly replaced by the solvency test as a means to protect creditors
because it is deemed to be insufficient. One of the main reasons for replacing the doctrine
is that the capital set out in the company‟s constitution represents the historical figure
41 David Millman” Priority Rights on Corporate Insolvency” in Clarke A. (Ed.) Current Issues in
Insolvency Law (Stevens and Sons, London, 1991) 57.
42 Len Sealy “Directors Wider Responsibilities- Problems Conceptual, Practical and Procedural” (1987) 13
Monash U.L. Rev. 164)
43 RP Austin and Ian Ramsay Ford’s Principles of Corporations Law (14 th ed., Lexis Nexis Butterworths,
NSW, 2010); John Farrar and Brenda Hannigan Farrar’s Company Law (4th ed., Butterworths, London
1998); LCB Gower Modern Company Law (6 th ed., Stevens, London, 1997).
44 Ibid.
45 Ibid.
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