Rebalancing company law and regulation for capital maintenance
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Accepted version
Embargoed until: 2099-01-01
Reason: Not yet published
Embargoed until: 2099-01-01
Reason: Not yet published
Publisher
Journal
European Company Law
ISSN
1572-4999
Metadata
Show full item recordAbstract
With a view to maintain the company as a going concern company law and regulation requires the maintenance of company financial capital to balance the competing financial claims between shareholders and creditors. Shareholders receive financial flows from a company whilst creditors require that prudential reserves are maintained to ensure some protection to their claims. To maintain prudential financial capital and protect creditors, company 2 regulation generally relies on two accounting metric tests. The first of these tests concerns distributions to shareholders and the extent to which these are made out of realized earnings of the period and accumulated retained earnings reserves that qualify for distribution. The second test requires that distributions to shareholders maintain a surplus of net assets equivalent to non-distributable shareholder equity. However the company law effectiveness in regulating financial capital maintenance is undermined in financialized companies. In the latter, the capacity of shareholder equity to absorb losses and maintain solvency is compromised by aggressive financial practices, including financial reporting, which result in hollowing out of equity capital reserves. In these circumstances, it is time to reconsider company law and regulation governing financial capital maintenance. This reconsideration draws upon the social license accompanying limited liability with a view to restoring prudential accounting practices and the preservation of solvency for the company to be a sustainable going concern for all stakeholders, including long-term shareholders and creditors.