Here is the explanation of the legal side of Capital Maintenance as quoted directly from The Capital Maintenance Concept and Share Repurchases in South African Law By F H I Cassim and Rehana Cassim The Capital maintenance concept The South African Companies Act 61 of 1973 adopts a strange and a curios ambivalence towards the nineteenth century common law concept of the maintenance of the share capital of a company In some respects the Companies Act still clings to this archaic and outdated concept while in other respects it boldly sweeps away the concept and replaces it with the more modern twins tests of liquidity and solvency as a form of creditor protection According to the capital maintenance concept the issued share capital of a company is seen as a guarantee fund or a permanent fund intended for the payment of the claims of the creditors of a company with the result that the issued share capital of a company may not be reduced nor may it be returned to shareholders except where the Companies Act or the common law authorizes it Thus Lord Halsbury L C in The Ooregum Gold Mining Company of India Ltd v Roper 1 declared that t he capital is fixed and certain and every creditor of the company is entitled to look to that capital as his security This was echoed some eight decades later in Cohen NO v Segal 2 where the court in prohibiting the payment of a dividend out of share capital proclaimed that w hatever has been paid by a member can not be returned to him and no part of the corpus of the company can be returned to a member so as to take away from the fund to which the creditors have a right to look as that out of which they are to be paid The capital may be spent or lost in carrying on the business of the company but it can not be reduced except in the manner and with the safeguards provided by the statute In accordance with this concept ss 81 and 82 of the Companies Act prohibit a company from issuing its shares at a discount unless certain stringent precautions have been complied with Section 79 prohibits a company from paying interest on shares out of share capital unless this is authorised by the articles of association of the company or by a special resolution the interest paid is restricted to a maximum of six per cent per annum and the approval of the Minister of Industries Commerce and Tourism has been obtained F H I Cassim LL B cum laude LL M um laude University of the Witwatersrand Johannesburg South Africa Advocate of the High Court of South Africa Associate Professor of Law University of the Witwatersrand Johannesburg South Africa Consultant with Bowman Gilfillan Inc Rehana Cassim BA cum laude LL B cum laude University of the Witwatersrand Johannesburg South Africa Bowman Gilfillan Inc These statutory provisions find their roots in the capital maintenance concept but it no longer makes any sense to preserve them in their present form because instead of complying with the burdensome requirements of s 79 a company may now simply make a payment including dividend payments in terms of s 90 as amended in 1999 whether out of capital or profits to its shareholders provided that this is authorised by its articles of association and that it satisfies the tests of liquidity and solvency as explained below A company may if it so desires prohibit in its articles of association such payments Section 90 abandons the common law concept of capital maintenance and together with it the fundamental common law principle that dividends may only be paid out of distributable profits Unlike English law ss 83 and 84 which regulated reductions of share capital have been repealed by s 8 of the Companies Amendment Act 37 of 1999 with the result that there is no longer any statutory procedure for the reduction of a company s share capital expect in accordance with s90 of the Companies Act Perhaps this conflict in the underlying philosophy and policy of the South African Companies Act is a direct result of the patchwork and piecemeal reform that has taken place in South African corporate law during the 30 year existence of the Companies Act of 1973 By way of contrast ss 135 141 of the UK Companies Act 1985 have preserved the statutory procedures and regulations relating to reductions of share capital Share repurchases Another vital aspect of the reform of the capital maintenance concept is the right conferred by s 85 of the Companies Act as amended by s 9 of the Companies Amendment Act 37 of 1999 to enable companies to purchase their own shares Until 1999 South African corporate law was one of the few remaining common law jurisdictions which continued to pr