INADEQUATE CAPITALIZATION OF AN ARUBAN COMPANY

May 07, 2010 6:53 AM

Liability for thin-capitalization?

In terms of ‘piercing the corporate veil’, thin or inadequate capitalization usually means capitalization that is not in proportion to the nature of the risks the business of the corporation necessarily entails; in other words it is based on likely economic needs rather than legal requirements

Shareholders of a company in Aruba are under an obligation to pay to the company what is due with respect to the shares, i.e. the shareholder’s capital contribution, and such contribution may not be withdrawn without due process. This is the only financial obligation of a shareholder towards the company, unless the shareholder agreed to a particular arrangement for capitalization.

Thin capitalization as such gives no rise for shareholder liability. The shareholder is not under a statutory duty to provide the company with any additional funds it may need. If, on the other hand, the shareholder misleads a third person regarding the financial status of the corporation so that the third person believes that the corporation has more capital than it actually has, then the shareholder could be held personally liable for his own behavior.

Shareholders can be held liable if inadequate capitalization is related to pervasive fraud, the abuse of corporate personality, or any other form of tort. Inadequate capitalization by itself does not lead to shareholders being liable for the debts of the company. Generally speaking, a shareholder’s sole liability is to pay the share capital.

Karel Frielink
Attorney (Lawyer) / Partner

7 May 2010