The capsule of the knee is a waterproof bladder which surrounds and protects the internal structures of the joint.
The deflated knee capsule has baggy folds at the bottom, which create the 'gutters' that the surgeon can see from the inside.
When the joint space fills with fluid the capsule prevents it escaping and the joint can blow up like a balloon.
Fluid in the knee
The inner part of the capsule is lined with special cells - synovial cells - that secrete the fluid that lubricates the knee. Clear fluid inside the capsule is called an effusion. Blood inside the capsule is called an haemarthrosis.
An anatomic study on the attachment of the joint capsule to the tibia in the lateral side of the knee. Nasu H, Nimura A, Sugiura S, Fujishiro H, Koga H, Akita K. Surg Radiol Anat. 2018 May;40(5):499-506.