The Capital Maintenance Doctrine Under Nigerian Company Law

Abstract

The rules regulating the maintenance of capital under Nigerian corporate law have not departed
much from the common law position enunciated in Trevor v Whitworth. Companies are
restricted from reducing capital, buying back their shares, paying dividends to shareholders or
financing the purchase of their shares, unless they meet a number of very stringent conditions
that nearly negate the possibility of such transactions. These rules are still applicable despite
years of epoch-making developments in business and finance. With the aim to drive reform of
the capital maintenance rules applicable in Nigeria, this paper seeks to: (i) identify specific flaws
in the Nigerian rules, (ii) compare these rules with the best capital maintenance rules from other
common law jurisdictions, and (iii) with regard to local peculiarities, suggest specific reforms to
the Nigerian capital maintenance rules. This paper adopts a doctrinal and analytical approach,
using the fundamental doctrine of corporate governance that compels the protection of creditors
as a background against which the Nigerian rules are analysed in comparison with rules from
other common law jurisdictions. This paper finds that the historical argument that the best way to
protect creditors is to hamstring companies through very restrictive capital maintenance rules is
flawed and outdated. Instead of the current rules and the judicial test which they mandate, a
combination of the solvency and liquidity tests is recommended as a pre-phase to capital
alteration or permitting a company to finance purchase of its own shares.