In my new paper 'Revisiting Legal Capital', I argue for the UK to revisit the legal capital (maintenance of capital) doctrine.
Leaving the EU could present an opportunity, but to reform legal capital just because Brexit may make it possible to do so would have little merit. Therefore, this paper draws upon experience since Centros and, more particularly, since the enactment of the UK Companies Act 2006, to put forward some rather more substantial arguments in favour of revisiting legal capital.
Three substantial reasons are developed. Firstly, the evidence against legal capital being an effective bulwark against short-termist corporate behaviour has continued to stack up. Secondly, difficulties associated with applying legal rules on distributions in the context of modern financial reporting requirements have persisted. Thirdly, we have a clearer sense of how creditors’ interests are affected by moving away from legal capital to solvency standards. The paper locates the need to revisit legal capital within the broader agenda for a system of effective corporate governance and regulation that supports economically worthwhile and sustainable business activity.
Eilis Ferran (FBA) is Professor of Company & Securities Law at the University of Cambridge, and a University JM Keynes Fellow in Financial Economics.