Abstract
The maintenance of capital doctrine has generated considerable debate in corporate law since its heyday in the late nineteenth century. Capital rules continue to be debated in jurisdictions as diverse as the China and the United Kingdom. It was long assumed that the doctrine protected a company’s creditors and ensured that directors applied the equity capital of the company properly. The success of this doctrine in achieving these protective goals has been questioned. As a consequence, corporate law rules regarding capital related decisions have progressively been reformed. One strategy relied upon by reformers is to link corporate capital decisions to various tests relating to solvency, fairness and material disclosure to shareholders. Australian lawmakers have moved away from the old prohibitive approaches to corporate capital changes by drawing upon such tests and mechanisms. The Corporations Act 2001 (Cth) adopts this more permissive approach requiring that solvency, fairness and disclosure issues be satisfied by directors before capital related decisions are made. These decisions include the payment of dividends, share capital reductions, share buy-backs, and the provision of financial assistance to purchase shares. These decisions are now made subject to the insolvent trading provisions found in s 588G of the Corporations Act. Thus, directors of companies making such decisions will be personally liable if they make such a decision in breach a duty imposed upon them to prevent the company from trading whilst insolvent where they have reasonable grounds for suspecting that the company was insolvent at the time that the capital related decision was made or would become insolvent as a result of the decision. This more liberal approach has been adopted in a number of other jurisdictions.
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