815006531

THE UNIVERSITY OF THE WEST INDIES

FACULTY OF LAW, ST. AUGUSTINE

Semester I- Academic Year 2023/2024

Law 6430- Advanced Corporate Finance Law

COURSE NAME: LAW 6430

COURSE DIRECTORS: Mr. John Jeremie, S.C.

STA STUDENT I.D. NO: 815006531

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The Capital Maintenance Doctrine: A Tightrope Walk in the Age of COVID-19

Introduction

For centuries, the capital maintenance doctrine has been a cornerstone of Corporate Finance.
Traditionally, these rules derived from a core doctrine in Commonwealth Caribbean company
law developed by the courts that a limited liability company was required to maintain its
subscribed capital by not returning it to shareholders of that company. This doctrine has
supplied rules governing such areas as the purchase and redemption by companies of their
own shares, the giving of financial assistance by companies to purchase their own shares, the
payment of dividends and the reduction of capital. This doctrine has been significantly altered
by regional companies Acts which contain extensive provisions that now regulate these areas.
Established by the landmark English House of Lords’ case Trevor v Whitworth1, it aimed to
safeguard creditors by preventing companies from returning capital to its shareholders until
all debts were settled. This ensured a company’s stability and prevented risky maneuvers that
could leave creditors high and dry.
However, since Trevor v Whitworth, the law and the landscape have shifted dramatically.
The doctrine has since arguably evolved, embracing greater flexibility while still seeking to
protect creditors.
With unanticipated risks such as the COVID-19 pandemic sending shockwaves through the
global financial system, companies found themselves teetering on the brink; bombarded with
uncertainty. The question then arose whether the recent reforms of the doctrine have served
the core stability ideals that were cherished by the earlier courts. Could the traditional capital
maintenance doctrine hold; or are the developments in the law more efficient at affording the
protection in the face of unanticipated risk?
This essay will delve into this critical debate by firstly identifying the common law doctrine
in Trevor v Whitworth2, and seeking to explore how the capital maintenance doctrine has
since evolved in Trinidad and Tobago and the Commonwealth Caribbean. This essay will also
analyse how events like the COVID-19 pandemic exposed potential cracks in this evolving
framework. It will explore whether the relaxation of the rules caused companies to prioritize
short-term gains at the risk of leaving its creditors vulnerable, or if the flexibility enabled
companies to weather the storm and emerge stronger. Ultimately, the goal is to explore

1
(1887) 12 App Cas 409
2
Trevor v Whitworth (n2)

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whether the law has actually progressed in light of these radical changes, especially having
regard to the demands of a changing market and unprecedented times.

The Capital Maintenance Doctrine and the rule in Trevor v Whitworth

A creditor who deals with a limited liability company takes the risk of the company becoming
unable to pay its debts as a result of the company losing capital in the ordinary course of its
business. However, as a matter of public policy, a creditor should be protected from capital
being returned to its shareholders prior to the winding up of the company.

In Trevor v Whitworth3 the Lords considered the provisions of the Joint Stock Companies
Act 1867 and concluded, by inference, that the legislature could not have intended that buy-
backs be allowed. The Act included two provisions of particular interest to the Lords. Firstly,
there was a requirement that the company should specify its nominal capital.’ Secondly, the
Act provided for a comprehensive procedure for reducing ’capital’ - the assets of the
company. From this, the Lords concluded - not unreasonably - that the legislature was
obviously concerned that the capital of companies should not be reduced by distribution
except in the manner set out in the legislation, which required court approval. At 437-8 Lord
MacNaughten said:
“When Parliament sanctions the doing of a thing under certain conditions and with certain
restrictions, it must be taken that the thing is prohibited unless the prescribed conditions and
restrictions are observed.”4
Lord MacNaughten drew the connection between in privilege of limited liability and the
capital maintenance doctrine saying that:
“It appears to me that the notion of a limited company taking power to buy its own shares is
contrary to the plain intention of the Companies Act of 1862, and inconsistent with the
conditions upon which, and upon which alone, Parliament has granted to individuals who are
desirous of trading in partnership the privilege of limiting their liability.”
The court held that buy-backs were a means of distributing capital to shareholders without
having to comply with the formal requirements as to reduction to capital. The Lords noted
that the legislature would not have gone through the trouble of incorporating safeguards for

3
Trevor v Whitworth (n3)
4
Trevor v Whitworth (n4), 437

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capital reductions if it has intended that the formal requirements could be avoided by so
simple a device as a buy-back.

Jessel MR in Re Exchange Banking Co, Flitcroft’s Case 5 explained the logic of the capital
maintenance doctrine:
A limited company by its memorandum of association declares that its capital is to be
applied for the purposes of the business. It cannot reduce its capital except in the
manner and with the safeguards provided by statute, and looking at the Act 40 & 41
Vict. c. 26, it clearly is against the intention of the Legislature that any portion of the
capital should be returned to the shareholders without the statutory conditions being
complied with. A limited company cannot in any other way make a return of capital,
the sanction of a general meeting can give no validity to such a proceeding, and even
the sanction of every shareholder cannot bring within the powers of the company an
act which is not within its powers. If, therefore, the shareholders had all been present
at the meetings, and had all
known the facts, and had all concurred in declaring the dividends, the payment of the
dividends would not be effectually sanctioned. One reason is this - there is a statement
that the capital shall be applied for the purposes of the business, and on the faith of
that statement, which is sometimes said to be an implied contract with creditors,
people dealing with the company give it credit. The creditor has no debtor but that
impalpable thing the corporation, which has no property except the assets of the
business. The creditor, therefore, I may say, gives credit to that capital, gives credit to
the company on the faith of the representation that the capital shall be applied only for
the purposes of the business, and he has therefore a right to say that the corporation
shall keep its capital and not return it to the shareholders, though it may be a right
which he cannot enforce otherwise than by a winding-up order.

In Trevor v Withworth6, Lord Watson clarified that the doctrine itself does not seek to
guarantee that capital will remain intact until the creditors wish to have recourse to it; instead,
he said that the law prohibits:
every transaction between a company and a shareholder, by means of which the
money already paid to the company in respect of his shares is returned to him, unless

5
(1882) LR 21 Ch D 519
6
Trevor v Whitworth (n5), 423-424

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the court has authorised the transaction. Paid up capital may be diminished or lost in
the course of the company’s trading; that is a result which no legislation can prevent;
but persons who deal with, and give credit to a limited company, naturally rely upon
the fact that the company is trading with a certain amount of capital already paid, as
well as upon the
responsibility of its members for the remainder of the capital at call; and they are
entitled to assume that no part of the capital which has been paid into the coffers of
the company has been subsequently paid out, except in the legitimate course of its
business.
The capital maintenance doctrine therefore seeks to provide a safeguard for creditors.

The rule in Trevor v Whitworth is an expression of the capital maintenance doctrine with its
core principle being to protect creditors by preventing companies from returning capital to
shareholders before creditors were paid in full. The foundation of the rule is that allowing a
company to own its own shares is tantamount to allowing a return of capital to shareholders.
In Trevor v Whitworth the issue before the court concerned the interpretation and
enforcement of an article in the company's Articles of incorporation. The Article gave the
company, James Schofield and Sons Limited, very extensive powers to purchase its own
shares. The company entered into a contract to buy shares of the company from one of its
shareholders, and it paid in part for shares that the company bought pursuant to that
arrangement but didn't complete the purchase. The shareholder brought a claim for the
company to complete the transaction and purchase the shares.
The case is decided eventually by the English House of Lords, which held that that the claim
should fail because of the foundational principle which had to be read alongside Salomon v
Salomon7 which required the court to find that no part of a company's capital is equity to be
returned to shareholders, because to do that would be to allow for a dissipation of the
shareholder's accounts from which creditors had a right to expect to be paid.
Lord Watson in Trevor v Whitworth espoused that “one of the main objects contemplated by
the legislature in restricting the power of limited companies to reduce the amount of their
capital as set forth in the memorandum, is to protect the interests of the outside of the public
who may become their creditors.”8

7
[1897] AC 22
8
Trevor v Whitworth, per Lord Watson

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He further stated that it was his opinion that “the effect of these statutory restrictions is to
prohibit every transaction between a company and a shareholder, by means of which the
money already paid to the company in respect of his shares is returned to him, unless the
Court has sanctioned the transaction. Paid-up capital may be diminished or lost in the course
of the company’s trading; that is a result which no legislature can prevent; but persons who
deal with, and give credit to a limited liability company, naturally rely upon the fact that the
company is trading with a certain amount of capita; already paid, as well as upon the
responsibility of its members for the capital remaining at call; and they are entitled to assume
that no part of the capital which has been paid into the coffers of the company has been
subsequently paid out, except in the legitimate course of its business.”
The doctrine of capital maintenance is formed by two sets of rules which created to provide
that the company achieves the capital which it intended to raise and prohibit the return of
capital to the shareholders9.

Lord McNaughten on the third point raised for the consideration of the court in Trevor v
Whitworth10 stated that it was one of general importance as it raised the question of whether
it is competent for a company formed under the Act of 1862, on the principle of limited
liability, to purchase its own shares when it is authorized by its articles to do so. He stated
that the consideration of that question negs the broader question of whether it is competent
for a limited liability company under any circumstances to invest in any portion of its capital
stock, or to return any portion of its capital to any shareholder without following the course
which Parliament has prescribed. In response to both questions, Lord McNaughten was of the
opinion that the answer was no ‘without the slightest doubt or hesitation.’
He further opined that “It appears to me that notion of a limited company taking power to buy
up its own shares is contrary to the plain intention of the Act of 1862, and inconsistent with
the conditions upon which, and upon which alone, Parliament has granted individuals who
are desirous of trading in partnership of limiting their liability.

Though Trevor v Whitworth is decided in the context of own share purchases, it is

important to note that Lord Watson was not just dealing with the prohibition on purchase by a
company of its own shares, but to every transaction that a company can undertake. These
include the reduction on capital as a result of transferring money back to the shareholders, the

9
Hannigan, pp 587-588
10
Trevor v Whitworth, per Lord MacNaughten

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paying of dividends out of capital, and the giving of financial assistance for the purchase of
its own shares.

The rationale is that if a company is prohibited from buying its own shares without
prohibiting the company from lending money to buy its shares, the purpose of the former will
not be achieved. There will still be a depletion of the company’s capital account. Similarly,
the payment of dividends where the company is not making profit can also result in the
depletion of the company's capital account. If there is no profit from which dividends can be
paid, the only other way in which dividends can be paid to shareholders is from the
company’s capital account. These therefore will have the same financial effect as own share
purchases; and all constitute part of the mischief that is outlawed in Trevor v Whitworth.

Developments in the Commonwealth Caribbean

The Companies Act 1981 made provision for, inter alia, a repurchase (or ’buy-back’) power.
The 1989 amendments incorporated a number of restrictions which were designed to guard
against misuse of the power, while affording adequate protection to creditors. These
amendments have subsequently been included in the Companies Act like our own in Trinidad
and Tobago.

The rules in Trevor v Whitworth are now subject to statutory regulation in the Companies
Acts across the Commonwealth Caribbean. The Companies Act of Trinidad and Tobago
Chapter 81:01 (“the Act”) has codified the rule in a general provision prohibiting a company
from holding its own shares11. The Act has also enacted exceptions to both the statutory and
common law versions of the Trevor v Whitworth rule in provisions dealing with own share
acquisition and own share redemption. The key developments in the law have increased its
flexibility and placed a focus on solvency.

Own-share Ownership

Section 41(1) of the Act provides that “subject to subsection (2), and except as provided by
sections 42 to 45, a company shall not hold shares in itself or in its holding body corporate;
and shall not permit any of its subsidiary bodies corporate to acquire shares of the company.”
11
The Companies Act of Trinidad and Tobago Chapter 81:01, s. 41(1)

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This section is a general provision prohibiting companies from holding shares in itself or in
its holding company. Subsection 2 provides that if a subsidiary company of a company holds
shares in its holding company, the holding company must cause the subsidiary to sell/ dispose
of those shares within 5 years from date the company became a subsidiary.
Section 41(2) of the Act stipulates that a company that holds shares in itself or in its holding
company in the capacity of a legal representative is exempted from this general prohibition
against own-share holding, unless the company, holding company or subsidiary has a
beneficial interest in the shares.

As is customary within the law, every general rule has exceptions. The prohibition in
Companies Acts across the region against a company holding its own shares is subject to two
exceptions. these exceptions permit own share purchases and share redemption in certain
circumstances. Firstly, companies are now given general power to acquire their own shares,
but this power is subject to a proviso; a company is prohibited from acquiring its own shares
if there are reasonable grounds to believe 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 assets would, after that payment, be less than the aggregate of its liabilities and
stated capital of all classes. Section 4312 of the Act creates a solvency requirement. In
Trinidad and Tobago this provision replaces the common law.

Professor Burgess in his text, Commonwealth Caribbean Company Law explains that the
rationale for these exceptions (page 715) is that if the legislation allows companies in the
Commonwealth Caribbean, most of which typically have scarce resources, to purchase their
own shares, then it’ll create a market where one would not have otherwise existed. Own share
purchase and share redemption/ share buy-back has thus become a common feature of
modern corporate financing, especially in these small companies where the is no active
market for the company’s shares.
Companies therefore can engage in own share purchases where it will not affect their
solvency, in light of the going concern principle.

Under section 44(1) of the Act, a company also has the power to acquire shares issued by it
for certain statutorily specified purposes. These include a purchase to settle or compromise a
debt or claim asserted by or against the company; to eliminate fractional shares; or to fulfil
12
The Companies Act of Trinidad and Tobago Chapter 81:01

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the terms of a non-assignable agreement under which the company has an option or is obliged
to purchase shares owned by an officer or employee of the company. Section 44(2) contains
other statutorily specified purposes, that is, a purchase to satisfy the claim of a dissenting
shareholder and a purchase to comply with an order of the Court under section 242 to restrain
oppression.
All of this is to say that this is a modification, and relaxing of the rule in Trevor v
Whitworth; which provided a definite no to the questions of whether a company could
purchase its own shares.

As a result of same, companies have employed own-share purchases as an aspect of their

financing strategy. This is because share buy-backs may be used as a means of enhancing
earnings per share when market conditions make it difficult otherwise. Buy-backs can also be
attractive to institutional investors who, because of the size of their holdings, find it difficult
to sell their holding in the market in the normal way. Though this essay seeks to explore the
issues in the context of the Commonwealth Caribbean, it is useful to make mention of
perhaps the most famous example of share buy-backs usefulness; the Apple Incorporated
share buy-back scheme of 2012.
Apple's 2012 share buy-back scheme was a significant event, not just for the company itself
but also for the broader corporate finance landscape. In March 2012, Apple announced a $10
billion share buy-back program, marking a shift in its capital allocation strategy. Apple's
share price soared, appreciating by over 250% since the buyback program's inception.
Apple announced a ground-breaking move, a $10 billion share buyback program, the largest
in its history at the time. This decision came after years of rapid growth and accumulating
cash reserves, leaving investors wondering what the company planned to do with its wealth.
The initial program authorized $10 billion in share buybacks, with the flexibility to adjust the
amount over three years. This signaled a significant commitment to returning capital to
shareholders. Apple utilized various mechanisms for the buybacks, including open market
purchases, block trades, and accelerated share repurchases. This provided flexibility and
efficiency in acquiring shares. The program was implemented in phases, allowing Apple to
adapt based on market conditions and its own financial needs. This cautious approach
minimized potential risks.
Apple maintained consistent communication with investors throughout the
program, providing regular updates on the progress and rationale behind the buybacks. This
fostered trust and confidence. Apple's stock price steadily increased following the
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announcement, exceeding $700 per share within five years. This translated to significant
shareholder value creation. The buybacks allowed Apple to efficiently manage its cash
reserves, avoiding the pitfalls of excessive cash hoarding or risky investments. This freed up
resources for other strategic priorities, such as research and development and strategic
acquisitions. The program also boosted investor confidence, signalling Apple's commitment
to shareholder value and financial discipline. This attracted new investment and further
strengthened the company's financial position. Apple's buyback program became a
benchmark for other tech giants, sparking a trend of aggressive share repurchases across the
industry. This had a broader impact on market dynamics and shareholder expectations.
Some critics argued that the program prioritized short-term shareholder gains over long-term
investments in innovation and employee development. This raised concerns about potential
future implications for the company's growth and competitiveness. As Apple's buyback
program grew, it attracted scrutiny from regulators concerned about its potential impact on
market manipulation and competitive advantages. This led to increased compliance
requirements and closer monitoring.
Overall, Apple's 2012 share buyback scheme was a resounding success. It significantly
increased shareholder value, boosted investor confidence, and established the company as a
leader in capital allocation. However, the program also sparked important debates about the
role of buybacks in corporate finance and their potential consequences for long-term growth,
inequality, and market dynamics. Apple's experience provides valuable lessons for other
companies and policymakers navigating the complex world of share buybacks.
This suggests a positive correlation between the buybacks and shareholder value. However,
the aggressive share buy-backs sparked controversy as critics argued that it prioritized short-
term gains for shareholders over long-term investments in research, development, and
employee compensation. Instead of increasing dividends, companies, like Apple aggressively
bought back their own shares. This model has still been used to justify the continued retention
of companies entering the market of their own shares.

The statutory developments like our section 43 have undermined the common law not only in
relation to own share purchases, but in the other two areas in which the common law was
developed, that is, financial assistance to purchase company shares and the payment of
dividends where the company is not making a profit.

Financial Assistance to in Own-Share Acquisition

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As mentioned earlier, the rationale for the prohibition against companies rendering financial
assistance to purchase it shares, is that if a company is prohibited from buying its own shares
without prohibiting the company from lending money to buy its shares, the purpose of the
former will not be achieved. The company’s capital account will still be depleted.
This therefore brings us to the second change brought about by the legislation. The Act also
contains provisions regulating the provision of financial assistance by a company in the
acquisition of its own shares. Section 56(1) of the Act states that13:
“56(1) When circumstances prejudicial to the company exist, the company or any
company with which it is affiliated shall not directly or indirectly, give financial
assistance by means of loan, guarantee or otherwise-
(a) to a shareholder, director officer or employee of the company or affiliated
company, or to an associate of any such person for any purpose; or
(b) to any person for the purpose of, or in connection with, a purchase of a
share issue or to be issued by the company or a company with which it is
affiliated.”

This statutory rule has been viewed as an aspect of the Trevor v Whitworth prohibition
against a company purchasing its own shares and of the capital maintenance rule. The giving
of financial assistance in own shares purchase, has often been an aspect of what may be
considered abusive schemes. Such an abusive scheme can be seen in Selangor United
Rubber Estates Ltd v Craddock (No 3)14 where the branch of District Bank advanced a
large sum of money at the request of a customer, Cradock. The reason that the customer
wished the bank to advance moneys was that he desired to effect the acquisition illegally of
the shares of Selangor through an intermediary, the Contaglo Banking. It was Cradock's
intention that the shareholding of Selangor would be purchased by using the company's own
funds. Cradock told officers of the bank that he might influence the transfer of the Selangor
account from its existing bank, National, to District. He asked for a bankers' draft in favour of
Contaglo and in exchange promised that the bank would receive a draft to cover the advance.
Subsequently, District Bank complied with Cradock's request but the bank did not receive a
draft in exchange. Instead, it received a cheque drawn on the Selangor account, which was
duly transferred from the National Bank. This cheque was made out in the name of a third

13
The Companies Act of Trinidad and Tobago Chapter 81:01
14
[1968] 2 Lloyd's Rep. 289

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party which had endorsed it in turn to Cradock. Subsequently, this cheque was debited against
the company's new account, which had been placed in funds sufficient to meet the cheque.
The amount of the cheque was credited to Cradock's account. In this way Contaglo, or
effectively Cradock, acquired Selangor by using its own funds for the purpose of acquiring its
shares. It is the prevention of these kind of abuses which are likely to arise from the giving of
financial assistance in own share purchase that is the major justification for the present
provisions in regional Acts.
The rule against a company giving financial assistance for the purchase of its own shares is
now substantially relaxed in the Act as based on section 56(1), it is only prohibited where
circumstances prejudicial to the company exists. Circumstances prejudicial to the company
are codified in section 56(2) of the Act as existing in respect of financial assistance when
“there are reasonable grounds for believing that the company is unable or would, after giving
the financial assistance, be unable to pay its liabilities as they become due; or the realisable
value of the company’s assets, excluding the amount of any financial assistance in the form of
a loan and in the form of assets pledged or encumbered to secure a guarantee would, after
giving the financial assistance, be less than the aggregate of its liabilities and stated capital of
all classes.” This further highlights the focus on solvency. In Nelson v Rentown Enterprises
Inc15. it was held that the solvency requirement must be satisfied both when the contract is
made and when it is performed.
The general provisions do not apply if the giving if the financial assistance falls within any of
the cases permitted under the Act 16. The Canadian case of Clarke v Technical and
Marketing Associates Limited Estate17 concerned a leveraged buyout where there was a
guarantee of the obligation to pay for assets of the purchased company. The purchasing
company and the company giving the guarantee were merged and the new company then
went bankrupt. On the issue of the validity of the general security agreement, it was held that
it was valid as it was financial assistance to a body corporate by a wholly owned subsidiary. It
was permitted under the Act and the general prohibition against the giving of financial
assistance was inapplicable.
A further relaxation of the common law principle that a company ought not render financial
assistance for the purpose of purchasing company shares can be seen in Section 57 of the
Act. It expressly allows for contracts made by a company in contravention of the statutory

15
(1992) 5 Alta LR (3d) 149 Alta LR
16
The Companies Act of Trinidad and Tobago Chapter 81:01, s. 56(1)
17
(1992), 8 O.R.(3d) 734 (Gen. Div.)

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prohibition against the giving of financial assistance to (may) be enforced by the company or
by a lender for value in good faith without notice of the contravention. According to
Professor Burgess, this provision “appears to be based in the assumption that a contract made
by a company in contravention of the statutory prohibition is not enforceable and to be
intended to protect a lender for value in good faith without notice from this result.” The
protection ‘lender for value in good faith without notice’ was contemplated in the case of
Royal Bank of Canada v Stewart et al 18 where the bank was asked to lend sufficient funds
for the purpose of buying the shares of one of the shareholders, by way of a secured loan. The
loan was not repaid, and the bank sued on its security. Based on the evidence, the assistant
manager of the bank was aware if the purpose of the loan, and the attorneys for the bank were
involved in the preparation of the security documents. The court held that in the
circumstances that the bank had imputed notice and therefore could not rely on the good faith
protection, so the claim consequently failed. Therefore, Royal Bank of Canada v Stewart et
al19 can be persuasive that section 57 of the Act does not avail where the lender has sufficient
information or sufficient information can be imputed to him to put him on enquiry. In
Huband J.A. in Petro-Canadci v. Cojef Ltd 20., [1992] M.J. No. 575 (Man. C.A.), at p. 2,
said:
“There is merit in the argument that Petro-Canada cannot turn a blind eye toward the obvious.
Moreover, Petro- Canada must be judged, not on the basis of an unsophisticated lender, but as
one whose business it is to extend credit on the basis of guarantees. Petro-Canada is aware of
the hazards of relying on a guarantee which proves unenforceable by virtue of sec. 42(1). It
cannot claim the benefit of sec. 42(3) by ignoring the obvious and neglecting to ask
questions.” This case can therefore also be persuasive in arguing that section 57 also cannot
avail the ‘sophisticated lender.’

Payment of dividends where the company is not making a profit

At the common law, the payment of dividends where the company is not making profit can
also result in the reduction of the company's capital account. If there is no profit from which
dividends can be paid, the only other way in which dividends can be paid to shareholders is

18
(1979) 8 BLR 77 BC
19
Royal Bank of Canada v Stewart et al (n1)
20
[1992] M.J. No. 575 (Man. C.A.), at p. 2

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from the company’s capital account; having therefore the same financial effect as own share
purchases.
There is an inherent risk in the payment of dividends that the capital maintenance rule may be
offended by the distribution of the company’s capital to shareholders in the form of payments
of capital masquerading as dividends. While in some territories, the statutes appear to have
codified the common law rule, the Act in Trinidad and Tobago appears to have abolished the
common law rule.
Section 54 of the Act provides that A company shall not declare or pay a dividend if there are
reasonable grounds for believing that— (a) the company is unable, or would, after the
payment, be unable, to pay its liabilities as they become due; or (b) the realisable value of the
company’s assets would thereby be less than the aggregate of its liabilities and stated capital
of all classes.
Section 55 of the Act goes further to say that (1) Subject to section 54 and subsection (2), a
company may pay a dividend in money, in property, or by issuing fully paid shares of the
company. (2) A company shall not pay a dividend in money or in property out of unrealised
profits. (3) If shares of a company are issued in payment of a dividend, the value of the
dividend stated as an amount in money shall be added to the stated capital account
maintained or to be maintained for the shares of the class or series issued in payment of the
dividend.

Therefore, the statutory system for the declaration of dividends under the Act is according to
Professor Burgess, is based on a simple prohibition against a company declaring or paying a
dividend if there are reasonable grounds for believing that the company is or would be
insolvent after the payment of a dividend, and by providing a specific test for determining the
insolvency of a company21.
Professor Burgess further opines that the Act because the Act avoids any reference to
‘profits’, ‘capital’, or ‘solvency’, that this is an indication that the common law rules and
cases based on the rules have no application under the regime established under the Act.

All in all, we see that the common law doctrine as espoused in Trevor v Whitworth22 formed
a barrier to a more relaxed approach since it prohibits every transaction between a company
and a shareholder, by means of which the money already paid to the company in respect of

21
A. Burgess ,Commonwealth Caribbean Company Law, (Routledge 2013)
22
(1887) 12 App Cas 409

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his shares is returned to him, unless the court has authorised the transaction. The rigidity of
the rule in Trevor v Whitworth could not support the need for the increase of share
repurchases as a financial tool in the changing economic and financial landscape.

In light of the changes to the law, the efficiency of the rules and regulatory standards at
affording protection to creditors, especially in the face of the unexpected has been questioned.
It begs the question of whether the relaxation of the capital maintenance doctrine has proven
to be ‘notoriously’ inefficient at affording protection in the face of unanticipated risk? For the
purpose of this investigation, the COVID-19 pandemic (“the pandemic”) will be the
unprecedented event explored. The pandemic served as a test for the effectiveness of reforms
in managing risk.
The main issue to be discussed is whether the recent radical reforms were a movement in the
right direction, or if the evidence leans in favour of the core stability ideals that were
cherished by the earlier courts. There is no easy answer to this issue, but the research in this
area illuminates a complex balancing act between company’s abilities to navigate the
demands of a changing market while honouring their responsibility to creditors.

On one hand, the flexibility and resilience of the reforms have allowed has proven efficient in
affording protection in the face of the pandemic. An increased flexibility for companies to
manage its capital structure enables companies to preserve cash and liquidity during
lockdowns and economic downturns as experienced in 2019 to 2021. It also allowed for
companies to invest in essential resources to adapt to changing market demands, and in some
cases to avoid bankruptcy. Companies around the globe and within the Commonwealth
Caribbean were able to adopt measures such as share buy backs, capital reductions and
dividend adjustments as a result of the reforms to the law. Jamaica’s Grace Kennedy Limited
has since used a combination of share buy backs and dividend adjustments to manage its
capital structure during the pandemic. The conglomerate was able to retain cash for essential
investments in their core financial services.
Another argument in favour of the legislative relaxation of the capital maintenance doctrine is
that it can result in enhanced resilience in the face of future shocks. This is because
companies with a strong financial buffer will be better equipped to handle unforeseen
challenges. A more relaxed approach also allows for quicker responses and adjustments
without as many legal hurdles to get over.

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Luskin, Donald, Hynes and Chris in the article “Worst Coronavirus Idea: A Ban on Share
Buybacks”23 was of the opinion that buybacks create benefits for shareholders large and
small, and are a valuable source of cash for many. Buybacks are superior because they give
shareholders a choice. Shareholders must receive a dividend when it's declared and pay taxes
on it. In a share buyback, investors who want cash can sell some shares and pay taxes. If they
don't want cash, they can choose to hold on to their shares.
Notwithstanding this, the arguments seem to lean more in favour that the recent reforms are
not efficient in the face of unanticipated risk. In fact, it can be said to have cause weakened
protection and has been abused/ has the potential to be abused by companies.
The Article by Jacob Schlesinger24 provides an excellent illustration of the toss up on the
issue at play in the United States; where congressional leaders agreed to impose limits on
stock buy-backs and dividend payments for the Airline Industry and other companies who
were receiving aid under the coronavirus-stimulus package. The idea behind it was to curb
the ability of certain firms to reward shareholders. Defenders of share buyback schemes said
where companies repurchase their own shares from shareholders, that the transaction can help
boost share prices, by reducing the amount of stock outstanding and lifting a company’s
earnings per share benchmark. However, critics were of the opinion that that the transaction
illustrates flaws in the modern economy, where companies place a higher priority of
rewarding shareholders than on maintaining a financial cushion in the case of an emergency
such as the pandemic.
The argument goes to the heart of the criticisms of consequences of the changes to our own
laws in the Caribbean.
The issue arises because some of the most distressed companies seeking the aid were the
airline industry, such as Boeing Company, and big hotel chains who all spent heavily on
buybacks in recent years, depleting their capital and being left unprotected in the face of
unanticipated risk.
This ongoing debate as to be desirability of allowing companies to purchase their own shares
has raged intermittently for decades and has been the subject of many inquiries, reports and
commissions all over the world.25

23
Luskin, Donalad, L. Hynes, Chris Wall Street Journal, Eastern Edn, March 2020 A. 17
24
Coronavirus Stimulus Package to Curb on Share Buybacks, 25 Mar 2020
25
McCabe. B, The Desirability of a Share Buyback Power, (1991) 3 Bond LR

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Many have found that it is simply not fair that creditors be exposed to any risk associated
with the repurchase power in light of the bargain that underlies the whole concept of limited
liability. A risk that is made even more real in the face of global shocks like the pandemic.

On the other hand, some argue that the doctrine of capital maintenance provides adequate
protection for creditors, thereby justifying continued application of the prohibition against
repurchase. Harding makes the point, however, that even an inadequate protection is better
than nothing. The limited liability bargain, referred to earlier, requires us to at least attempt to
do whatever can be done to protect the security of creditors, regardless of whether those
attempts will often be futile, or ‘notoriously ineffective.’

To bring the discussion a little closer to home, reforms to the law can be seen to be
progressive for a country like Trinidad and Tobago whose business model is most typically
smaller companies.
A repurchase power will facilitate small companies in their endeavours to raise equity. Where
shares are not readily transferable, potential investors may need the sweetener of having an
assured buyer for their shares, in and outside of the context of unanticipated risk.
A further argument typically put in relation to smaller companies it’s that a repurchase power
would help stabilise the market for shares, particularly where there is a large shareholder who
may decide to sell and swamp the market.

Notwithstanding the fact that share buybacks can be a legitimate tool for managing capital
and rewarding shareholders, their use during the pandemic undoubtedly raised concerns.
Companies were using the relaxation of the capital maintenance doctrine to return capital to
shareholders even while facing significant financial uncertainty and potential risks. This
weakened their financial position and made them less resilient in the face of further economic
shocks.

The COVID-19 pandemic has therefore highlighted the need for a careful balance between
the flexibility of corporate finance and the protection of creditors. While the relaxation of the
capital maintenance doctrine has allowed companies to adapt to the challenges of the
pandemic, it is crucial to ensure that this flexibility is not abused at the expense of creditors'
interests. It may not be fair to say that regulatory standards are notoriously inefficient at
affording protection in the face of unanticipated risk, but history will definitely be the
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ultimate judge as to whether the recent reforms have served the core stability ideals cherished
by the earlier courts, while still allowing the flexibility needed to keep up with the developing
landscape of corporate finance. Ongoing monitoring and regulatory oversight will be
essential to maintaining this balance in the future.

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