22.6.1.1 A vague term

The exact contents of the term ‘undercapitalization’ and its standard meaning are not clear. The term hardly plays any role in the Dutch regulation of shareholder funding. Even though a considerable number of legal academics believe that in the Netherlands, an unwritten rule applies to the effect that the funding of the company must be in reasonable proportion to the activities the company develops; the term is rarely used in case law. In part, this may be because different authors attach different meanings to the term.

The term undercapitalization is frequently used in American case law and literature; however, in the US, as well, not everyone seems to understand this term in the same way. Even though there is case law from which it may be inferred that undercapitalization may constitute grounds for the liability of shareholders, and a considerable number of American authors have advocated in favour of such a rule, based on a majority of American rulings it may be concluded that without additional circumstances, in and of itself, undercapitalization is insufficient to assume the liability of shareholders or subordination of shareholder loans. It is clear that capital withdrawals by shareholders that result in an unreasonably small capital can be reclaimed in bankruptcy.

In Germany, there is a very great deal of legal literature on Unterkapitalisierung, and apparently a more uniform understanding of this term. Until the review of 2008, the term ‘nominal undercapitalization’ was used if the shareholders failed to fund the company with adequate capital, but did furnish loans to satisfy the company’s financial needs. In that case, the shareholder loans had to be subordinated. Given that since 2008, shareholder loans are automatically subordinated, ‘nominal undercapitalization’ is no longer a legally relevant term. In Germany, the term ‘substantive undercapitalization’ refers to situations where the shareholders have failed to fund the company with adequate equity in light of the scope and nature of the activities developed. A large number of legal academics support the introduction of the standard that shareholders can be liable vis-à-vis the company’s creditors based on substantive undercapitalization. The BGH has never accepted such a rule, but did explicitly leave open the possibility that substantive undercapitalization can qualify as a unerlaubte Handlung of the shareholder in the sense of § 826 BGB.