Dampened?

THE CAPITAL MAINTENANCE DOCTRINE FROM BARBADOS’ STANDPOINT- HAS THE SPIRIT OF TREVOR V WHITWORTH BEEN DAMPENED?

BY JAYDEE J’MOND K BOURNE

Through the lenses of creditors, the intent of the seminal case of Trevor v Whitworth (1887) 12 App Cas 409 Eng HL was probably not a blur when it emerged; the accentuation of the Capital Maintenance doctrine signaled fair treatment to them but unfortunately its fumes congested small and large limited liability companies.

It was the prevailing wisdom during the 19th century that creditors trading with limited liability companies were vulnerable. Many held that belief because companies were susceptible to losing capital when trading. Protecting companies’ capital was synonymous with protecting creditors’ interests.

Legal scholars have indicated that Trevor v Whitworth is an expression of the Capital Maintenance doctrine, a doctrine which aims to prevent companies from losing capital. In an effort to do so, issuing redeemable shares and allowing companies to purchase their own shares was prohibited.

It can be said that Barbados’ Companies Act has tailored the Trevor v Whitworth rule because it permits companies to hold their own shares and issue redeemable shares. However, it is arguable that although that is the case, the Act still cleverly preserves the spirit of Trevor v Whitworth by implementing the “solvency requirement” .

The Barbados Companies Act makes it clear. As long as the solvency requirement is met, companies can issue redeemable shares and can hold their own shares:

In the capacity of a legal representative only if the holding body corporate or subsidiary does not have a beneficiary interest in the shares.

By way of security for the purposes of a transaction entered into by it in the ordinary course of a business that includes the lending of money.

To settle or compromise a debt or claim asserted by or against the company. To eliminate fractional shares.

To fulfill the terms of a non-assignable agreement under which the company has an option or is obligated to purchase shares owned by a director, an officer or an employee of the company.

To satisfy the claim of a dissenting shareholder. To comply with an order to restrain acts of oppression.

The essence of the solvency requirement balances the interest of both creditors and limited liability companies. One can argue that it emphasizes that creditors’ interests should be of paramount importance because it states, “a company shall not make any payment to purchase or otherwise acquire shares issued by it, if there are reasonable grounds for believing that: The company is unable or would, after that payment, be unable to pay its liabilities as they become due or;

The realisable value of the company ’s asset would, after that payment, be less than the aggregate of its liabilities and stated capital of all classes.

”Redeemable shares are beneficial to limited liability companies. Since strictly adhering to the Capital Maintenance doctrine may not be a salutary rule to limited liability companies, it is fair to say that the Companies Act took a progressive step by modifying the Trevor v Whitworth rule. In doing so, it protects creditors’ interests and also gives limited liability companies space to breathe. Professor Burgess (as he then was) in Commonwealth Caribbean Company Law highlighted the reasons why limited liability companies may find redeemable shares to be appealing.

According to Professor Burgess, redeemable shares can be attractive to institutional investors who, because of the size of their holdings, face challenges selling their holdings in the market in the normal way. Additionally, he pointed out that they add flexibility in corporate financing techniques for small companies since they allow outsiders to invest in companies without being fearful of being “locked into the company ” . They also allow small companies to raise capital without worrying about the risk of losing control to outsiders. Moreover, large companies may use them as a means of enhancing earnings per share when market conditions make it difficult and they can also be used to provide incentive plans, stock option plans or similar plans without being required to extend equity base and to facilitate business combinations.

The Companies Act acknowledges that companies’ capital should not be seen as sacrosanct. From a Capital Maintenance standpoint, it considers the impact on limited liability companies and creditors. Since it does not run roughshod over creditors’ interests, it can be said that the spirit of Trevor v Whitworth has not been dampened.

THANK YOU!

CULTURAL AND ENTERTAINMENT COMMITTEE

On behalf of the Cultural and Entertainment Committee & the Student Representative Council, we would like to say thank you for taking the time out from your busy schedules to attend our online cocktail event "LOCUS CLASSICUS" . We hope that you were able to destress and have fun and we look forward to seeing you at our upcoming virtual events. Stay safe!

HUMAN RIGHTS COMMITTEE

The HWLS Human Rights Committee would like to thank each and everyone for their donations towards the laptop drive and kindly ask that more persons contribute towards this worthy cause in accordance with the rights of the child to education.