The two sides of the capital maintenance rules : creditor protection and company sustainability

Abstract

All major jurisdictions have laws protecting creditors' interests in cases of default or corporate insolvency. The Limited Liability Act of 1855 was a momentous legislative measure passed by the Parliament of the United Kingdom. Its objective was to promote corporate investment by restricting investors' liability. This event represented a crucial turning point in the development of corporation law, significantly influencing the environment for business and investment in the future. Since the establishment of limited liability companies, creditors who offer financial backing to incorporated entities have faced substantial risk. In this specific business context, lawmakers bear the responsibility of creating a conducive environment for commercial ventures. This involves protecting debt financiers to a degree that encourages their participation, among other duties. The legal capital regime is a corporate legal instrument that has traditionally been used to safeguard the interests of creditors. This regime consists of two components: (i) the distribution rule and (ii) the minimum capital rule. The distribution rule, also known as the capital maintenance rule, forbids the repayment of capital to investors and restricts a firm from distributing dividends or making payments to repurchase or redeem shares, unless in specific circumstances. The minimum capital regulation mandates that individuals who incorporate or register a business organisation must contribute assets with a value equal to or more than the stipulated minimum amount to the corporate asset pool. The laws primarily aim to safeguard the interests of creditors, while also addressing any disputes between creditors and opportunistic shareholders about the distribution of corporate funds. This thesis aims to discuss the legal background of capital maintenance doctrine and to argue why the antiquated rules do not serve their purpose with respect to creditor protection but rather serve as a costly and rigid structure deterring businesses from following better opportunities that would serve a wider audience. Alternative means of creditor protection will also be discussed. The thesis also aims to discuss the perspectives of creditors and shareholders regarding the capital maintenance doctrine and their expectations. Creditors expect comprehensive and timely settlements of their claims, but should one assume that all shareholders want is a distribution policy based on short-term vision or do they rather seek an increase in the value of the company and of their worth? The subject of Corporate Governance and Company Sustainability is a very important topic as it steers companies away from short-term results to ones that will reap benefits to wider audiences and last longer, promoting the going concern of companies.