n South African Law Journal - Regulating legal capital reduction : a comparison of creditor protection in South Africa and the state of Delaware




In modern corporate finance law, the solvency and liquidity threshold for making distributions from capital has superseded the highly technical regulatory regime of 'capital maintenance'. The capital maintenance rule was created as a means to protect creditors from prejudicial distributions of corporate 'legal capital', but the concept proved to be somewhat ineffective in practice. The solvency and liquidity requirements for distributions were introduced into the Companies Act 61 of 1973 by the Companies Amendment Act 37 of 1999, and reintroduced into the Companies Act 71 of 2008 free from the remnants of capital reduction terminology that endured before re-enactment. In Delaware, a state renowned for the permissiveness of its corporation laws, distributions continue to be regulated in terms of capital reduction. In view of the South African Companies Act of 2008's objectives being, inter alia, the encouragement of entrepreneurship, investment in the South African markets, and simplification of company law, this article, by comparing the approaches taken in South Africa and Delaware, seeks to assess whether the Act's move away from capital maintenance principles, traditionally associated with creditor protection, has appropriately simplified the provisions relating to capital reduction without having a detrimental impact on creditors.


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