CAPITAL MAINTENANCE REGIME
Some of the highlights of the capital maintenance regime include guidelines involving coverage of administrative costs. It also provides guidelines about the benefits and costs of solvency tests or any other alternative method that may be applied in the determination of distributable dividends[1]. It gives protection for shareholders and creditors that are in alternative regimes. In addition, the guidelines are also provided that help in the estimation of implementation and compliance costs for all kinds of regimes.
Capital maintenance refers to the ability of a company to maintain the capital that it began with at the end of a business transaction[2]. This is calculated according to the expenditure of the company put together with all other money that comes in. The company that has achieved capital maintenance is one that even after all the expenditure has been factored in, it is still able to record the same amount of capital from the beginning. Any excess amount that the company has collected for this purpose shall be treated as profit and will not be calculated in the ending capital amount. Capital maintenance is important for any company because it enables the company to stay afloat financially[3]. This is in the sense that when the company is able to record the same amount of money they had at the beginning, it can consider itself safe. It is even better when they are able to get a profit on top of the capital, but the later is the most crucial. Even in the cases where the company is undergoing financial trouble and it becomes necessary for them to sell off their assets, capital maintenance gives them a clear clue on how much they should have retained that may help in future activities.
Capital maintenance also gives the company a clue on calculation of profits[4]. This is in the sense that capital maintenance provides that income can only be calculated as present for a company once it has eliminated all kinds of expenditure. This is something that is sometimes missed by companies who end up calling starting capital so when in the real sense, once they subtract expenditure, the amount reduces to below the capital amount.
Asset stripping refers to an action by a company of buying a company that is not doing well financially and selling off its assets[5]. Most of the time when this happens, the amount gathered from the assets is usually higher than the initial cost of purchasing the company. Capital maintenance is also essential in asset stripping because it ensures that a company gets more money from selling than they did during purchase[6]. This helps in establishing things like the cost of selling the assets that will be calculated against buying costs with capital maintenance in mind.
Solvency declaration refers to a document that is filed at the Registrar of Companies. In it, a company declares all its assets and liabilities. It also contains the declaration that the company is bankrupt and that they are going to get back on their feet within a given time frame, usually twelve months[7]. It contains an affirmation by directors of the company, and a promise that the company will be solvent within the twelve months.
The main disadvantage that is contained in solvency declaration is that the company is incapable of transacting any business once it has filed the document with the registrar of companies. The owners of the company that is solvent are also not allowed to start a new company before they pay back all the money that they owe[8]. If they wish to begin a new enterprise, they are required to seek legal permission from the courts. By this time, it is already difficult to start afresh due to the bad publicity that the company together with its proprietors will have suffered as a result of the bankruptcy. This is inevitable for them, seeing as the declaration of solvency is supposed to be divulged to the press. This is a protective measure that ensures other people or companies do not unknowingly transact business with one that has been declared bankrupt[9].
Once a company files a solvency declaration, the advantage that it enjoys is that no company or individual that it owes money is able to ask for it back. This is because in essence the declaration states that you are unable to carry forward with the normal activities of the company because of lack of funds. Therefore it means you do not have the money to pay back all the debts that you owe. When a company files for the solvency declaration, it may have the chance to salvage some of the company assets that would have been sold off if the authorities in place would have been the ones to declare the company bankrupt. Also, the bankruptcy lasts only twelve months as will have been stipulated in the document when it is filed[10].
Bibliography
Armour, John. “Share capital and creditor protection: Efficient rules for a modern company law.” The Modern Law Review 63, no. 3 (2000): 355-378.
Bachelor, Lynn W. “Regime maintenance, solution sets, and urban economic development.” Urban Affairs Review 29, no. 4 (1994): 596-616.
Bartelmus, Peter. “Dematerialization and capital maintenance: two sides of the sustainability coin.” Ecological Economics 46, no. 1 (2003): 61-81.
Boucekkine, Raouf, and Ramon Ruiz-Tamarit. “Capital maintenance and investment: complements or substitutes?.” Journal of Economics 78, no. 1 (2003): 1-28.
Campos, Nauro F., and Francesco Giovannoni. “The Determinants of Asset Stripping: Theory and Evidence from the Transition Economies*.” Journal of Law and Economics 49, no. 2 (2006): 681-706.
Collard, Fabrice, and Tryphon Kollintzas. Maintenance, utilization, and depreciation along the business cycle. No. 2477. CEPR Discussion Papers, 2000.
Dias Simões, Fernando. “Legal Capital Rules in Europe: Is There Still Room for Creditor Protection?.” Available at SSRN 2004825 (2012).
Gynther, Reg S. “Capital maintenance, price changes, and profit determination.” Accounting Review (1970): 712-730.
Mescher, Barbara, and B. Juris. “Directors and Accountants and the Obligation to Ensure Proper Accounts are Kept.” Financial Reporting, Regulation and Governance 4, no. 2 (2005): 1-25.
Van der Linde, Kathleen. “The solvency and liquidity approach in the Companies Act 2008.” Tydskrif vir die Suid-Afrikaanse Reg 2 (2009): 224-240.
[1] Armour, John. “Share capital and creditor protection: Efficient rules for a modern company law.” The Modern Law Review 63, no. 3 (2000): 355-378.
[2] Boucekkine, Raouf, and Ramon Ruiz-Tamarit. “Capital maintenance and investment: complements or substitutes?.” Journal of Economics 78, no. 1 (2003): 1-28.
[3] Collard, Fabrice, and Tryphon Kollintzas. Maintenance, utilization, and depreciation along the business cycle. No. 2477. CEPR Discussion Papers, 2000.
[4] Gynther, Reg S. “Capital maintenance, price changes, and profit determination.” Accounting Review (1970): 712-730.
[5] Campos, Nauro F., and Francesco Giovannoni. “The Determinants of Asset Stripping: Theory and Evidence from the Transition Economies*.” Journal of Law and Economics 49, no. 2 (2006): 681-706.
[6] Bartelmus, Peter. “Dematerialization and capital maintenance: two sides of the sustainability coin.” Ecological Economics 46, no. 1 (2003): 61-81.
[7] Dias Simões, Fernando. “Legal Capital Rules in Europe: Is There Still Room for Creditor Protection?.” Available at SSRN 2004825 (2012).
[8] Bachelor, Lynn W. “Regime maintenance, solution sets, and urban economic development.” Urban Affairs Review 29, no. 4 (1994): 596-616.
[9] Mescher, Barbara, and B. Juris. “Directors and Accountants and the Obligation to Ensure Proper Accounts are Kept.” Financial Reporting, Regulation and Governance 4, no. 2 (2005): 1-25.
[10] Van der Linde, Kathleen. “The solvency and liquidity approach in the Companies Act 2008.” Tydskrif vir die Suid-Afrikaanse Reg 2 (2009): 224-240.