Corporate finance, undercapitalization and shareholders’ liability

Pieter Holthuis

March 16, 2017

Introduction

Since the abolishment of statutory minimum capital requirements for Dutch private limited liability companies (“BV’s”) in 2012 (this used to be € 18,000), we see a significant rise of companies that have been incorporated with little or no capital. Does the abolishment mean that the shareholders may freely choose to fund the company in any manner they like, say, by not funding it at all? Or are there circumstances in which they can be held liable for having undercapitalized the company?


General rule; shareholders’ liability and piercing the corporate veil

A shareholder is, in principle, not liable for acts performed in the name of the company in which he participates and he is under no obligation to contribute to the losses of the company in excess of the amount to be paid on his shares. [1]

An exception to this general rule applies in the event a shareholder received distributions from the company, whilst he knew or reasonably should have known that the company could, as a consequence of this distribution, not continue to pay its outstanding debts.

Pursuant to Dutch case law there are also various other grounds which, under exceptional circumstances, can result in liability of a shareholder for the company’s debts and obligations, such as:

  1. a tortuous act (onrechtmatige daad) committed by the shareholder; and
  2. an alter ego situation (vereenzelviging) as regards the shareholder and his company.


Shareholders’ liability and undercapitalization

Undercapitalization is the situation in which a company has insufficient funding, or capital, to support or continue its operations. If an undercapitalized company assumes trade debts this will ultimately be for the risk and account of its (involuntary) creditors. Now that there is no longer a statutory basis for shareholders to fund the company, it has been suggested [2] that there could be another legal basis for such obligation. Therefore the freedom to capitalize the company in the manner in which you like, is limited. In his thesis Barneveld lists three circumstances that could lead to shareholders’ liability resulting from tort/breach of a duty of care (zorgplicht):

  1. the shareholder was actively involved in the implementation of the undercapitalization/inadequate financial structure;
  2. the shareholder was in a position to prevent or end the inadequate financial structure;
  3. it was evident for the shareholder that the financial structure was inadequate.

In addition, other legal scholars believe that any inexperience of lack of relevant, financial knowledge should not free the shareholder from any liability.[3]


Conclusion

In my view, although Dutch legislation no longer provides for a minimum capital requirement, shareholders still have a duty of care to provide their company with sufficient funding in order to do business. Funding should be in proportion to the nature and scope of the business activities to be performed. I agree with Barneveld that only in the case the financial structure was – evidently – inadequate, liability may exist.

Although case law of shareholder liability concerning undercapitalization is scarce, this does not mean that shareholders are 100% free to choose any way to fund their company as they please; in fact given the steadily increase since 2012 of companies that have no minimum capital at all, whilst actively participating in business ventures with the support of suppliers litigation in the future on this topic is to be expected.


Our role

When setting up your company and thereafter, keep a close eye on the company’s financial structure – see the three bullets above – against the background of its business activities. We shall be pleased to advise you.

Our expertise and experience in this field enable us to offer solid advice when setting up your company or joint venture. Furthermore, we will be at your side when dealing with the most complex investments and participation agreements.

 

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