The doctrine of capital maintenance with particular reference to the reduction of share capital : a legal and fiscal perspective

Abstract

Since the time of Trevor vs. Whitworth, the capital maintenance doctrine has featured as being a principal mode of creditor protection. By time, different jurisdictions moved away from the traditional and uptight means of creditor protection and concerned themselves more with the rights and interests of companies. Nowadays, the capital maintenance doctrine varies and depends on the needs and wants of the particular jurisdiction. It is suggested that this doctrine should be eradicated since it does not satisfy its ultimate goal, that of protecting creditors. This notwithstanding, those jurisdictions which have removed the capital maintenance regime still find means of how to protect their creditors; for example, through the solvency and liquidity tests. Shedding a particular light on the process of reduction of share capital, this thesis shall be dealing with the reasons behind this process and how it is carried out. Here too, a brief comparative study shall be undertaken in order to better analyse the Maltese position. In fact, when compared to other systems, the Maltese system seems to be striking a fair balance between the rights of creditors and those of the companies in question. This process of reduction of share capital shall not only be examined from a company law perspective, but also from a fiscal perspective. Furthermore, both the Income Tax Act and the Duty on Documents and Transfers Act specifically deal with the process of reduction of share capital and how this attracts a charge to tax and duty. According to the Income Tax Act, a reduction of share capital is caught up in two tax points. It is not only deemed to be a transfer of the proportion of the holding but is also caught in the value shifting provisions.