Capital maintenance
Company law.
Capital maintenance is the company law principle - also sometimes known as capital conservation - that capital should be conserved for the protection of creditors.
For example, dividends can only legally be paid out of retained profits, not out of capital.
"Put simply, the rules on capital maintenance exist in order to protect the interests of creditors.
A key principle underlying the rules is that the capital base of a company (in the majority of cases share capital and share premium) must be maintained.
This is often referred to as the “creditors’ buffer’’.
The shareholders of a limited company have no liability for the losses of the company in which they have invested beyond the amount of
capital they have invested or agreed to invest.
The price paid for limited liability is that shareholders cannot simply withdraw the capital from the company at will.
The capital maintenance rules aim to protect creditors and other company stakeholders by preventing directors from paying dividends
or returning capital to members other than in limited circumstances.
As a company is, in law, a separate legal person from its owners, the owners cannot simply help themselves to the company’s property and assets.
The [capital maintenance] rules are tougher on public companies, which are subject to tighter restrictions than private companies in return for the ability to offer their shares publicly."
(Deloitte - Capital maintenance and distributions under the spotlight.)
See also
- Buffer
- Capital
- Capital adequacy
- Capital conservation
- Company law
- Creditors
- Deloitte
- Director
- Distribution
- Dividend
- Limited liability
- Principle
- Private company
- Profit and Loss reserve
- Public company
- Reserves
- Retained earnings
- Share capital
- Share premium
- Stakeholder
