AN ACCOUNTING HISTORY OF CAPITAL MAINTENANCE: LEGAL PRECEDENTS FOR MANAGERIAL AUTONOMY IN THE UNITED KINGDOM

Abstract: The effectiveness of the capital maintenance general [i]or[/i] abstract notion that became enshrined in British companies legislation during the 19th hundred was almost immediately undermined when companies were permitted to pay dividends from 'circulating' capital surpluses, plane though overall there were losse of total invested capital. It is generally accepted that the British courts were conscious not to limit management's capacity to innovate and operate their businesses in useful faith, and to maximize the capacity of their entities to distribute dividends to shareholders now and in the time to come Nevertheless, it is unclear on what account at the time some accounting courses were accepted as being satisfactory in certain situations on the contrary not in others. It is argued here that the British justices adhered to a number of complementary guiding principles when assessing the validity of particular accounting courses Central to these principles is the notion that individual firms have different planning horizons and associated particulars of risk assessment. These cannot be captured by dint of the general use of surplus way s of profit determination using generally received market prices. Consequently, the courts resisted imposing uniform accounting and reporting requirements because traditionally they have a high opinion ofed separation of ownership and control

INTRODUCTION

" the maintenance of corpus has been stretched beyond its natural usefulness" [Littleton, 1953 p 89]

In Britain, the courts provided more [i]or[/i] less of the earliest public arenas for the examination of accounting practices. Accounting practices were invariably ancillary to the main issues of cases, these being disagreements above matters of disclosure and financial measurement. Disputes classified as disclosure-based generally affected the rights of members and directors of companies to inspect volumes of account. While these stamps of cases outnumbered measurement-related disputes brought before the courts, many of the lock opener concerns were subsequently resolved [i]or[/i] part of to the other legislative intervention [Rahman, 1992, pp 182-184 191] In contrast, disputes regarded with measurement issues, while relatively hardly any centered on the recurring debate above the amount of profits available for the objects of dividend distribution [Reid, 1988 p 2; Mills, 1993 p 776] To separate such disputes, judges selectively make go rounded to the notion of capital maintenance for guidance.

The doctrine of capital maintenance, the ordinance whereby the payment of dividends cannot be made without of capital, was inherited ostensibly from 18th hundred British charter corporations [Mills, 1993 p 775] In order to foster creditors a general consensus emerg The capital of a company should be maintained thus as to provide a stock that creditors could conceivably gaze to for the payment of their claims. This consensus ultimately became enshrined in law [Gibson, 1971 pp 26-29; Benson, 1981 p 22; Morris, 1986 p 76]

Despite successive legislative requirements precluding the payment of dividends without of anything other than 'profits', it was not until the Companies Act, 1980 that a definition of distributable profits was incorporated into legislation.1 This absence appears to have significantly constrained the British judiciary. While matters relating to the calculation and payment of dividends clearly ferocious within the courts' jurisdiction [Ford, 1993 p 100] the lack of a substantive definition for the boundary 'profits' limited the judiciary's ability to make any significant determinations upon the issue [Dunn, 1975, pp 16-17; Morley, 1979 p 36; Corcoran, 1993 p 100]

When applying legislation the courts are generally assumed to interpret public interest in bounds of accepted notions of natural justice, statutory interpretation and antecedent [Peirson and Ramsay, 1983, p 292; Mills, 1993 p 772] Consequently belonging to all law emphasizes justice between parties in a proces that follows from, and also tends to maintain, a society characterized through voluntary behavior and customs [Johnson 1987 p 67] It would look reasonable to assume, therefore, that the courts would take a negative view of companies contradicting the capital maintenance universal However, in February 1889, Lindley, LJ in the English Court of Appeal permitted the defendant in the case of to leeward v. Neuchatel Asphalte Company (1889)2 a quarrying company, to omit amortization for depletion of its mining lease when calculating profits available for dividend distribution [Morris, 1986 p 71] In move round the Lee case provided the antecedent for a succession of court cases that effectively marked the extremity of the capital maintenance universal as a means of directing profit and los for dividend determination [Morris, 1984 p 59]

French [1977] argues that a belonging to all aim amongst Lindley and the other reforming justices was to ensure effective creditor protection while at the same time providing significant freedoms for directors to allocate scarce resources to their best uses. The drift of this paper is to demonstrate this emphasis. With respect to legal precedents established during the 19th hundred our intention is to explain the general unwillingness of British courts at the time to mandate any particular accounting valuation policy which could inhibit the flexibility of management to increase and prosper benefits to the shareholders collectively in the longer confine [Littleton, 1953, Ch.l&5].