On The Identification Of Inadequate Capitalization

The new version of Company Law cancelled The Legal Minimum Capital System on March 1, 2014. Since then the Paid-in Capital System has been changed by the Subscription Capital System. Under the new system of capital, the shareholders enjoy more business freedom while the problems hidden in The Legal Minimum Capital become more prominent. The disregard of corporate personality is an effective means to protect interests of creditors. Once the corporate veil is revealed, the company controlling shareholders should assume joint liabilities for the debts of the company. Therefore, this thesis attempts to explore issues about undercapitalization, anticipating that company creditors would act in interests of themselves by making better use of disregard of corporation personality in the situation of undercapitalization. The legal sense of undercapitalization in denying the company personality is significant. To demonstrate the importance of undercapitalization in the disregard of corporate personality from two aspects: abuse of rights can be presumed by undercapitalization, and undercapitalization is a substantial element of the disregard of corporate personality. Taking this one step further, the theory of undercapitalization is illuminated. Through comparison of different vi ews, the real connotation of undercapitalization is defined as a phenomenon that the equity capital invested by shareholders is inconsistent with the firm size and potential risks, which leads to the corporate capital cannot deal with the business risks. In order to compensate for the defects in understanding of undercapitalization and defective capital contribution, their relationship is clarified further. America, which is the birthplace of piercing the corporate veil, has a mature theoretical system. So it is of great importance for juridical practice by investigating the application of undercapitalization in America. The innovation of this thesis is to create an objective standard of affirming undercapitalization. The evaluation of the equity capital condition of a company should base on whether the equity capital meets the demand of normal operation of a company and undertaking the basic debts. The standard can be classified into industry standard and market standard. At the end of this thesis, legislati ve suggestions are given in aspects of the characters of undercapitalization, its time standard, and the burden of proof of undercapitalization, etc. This research will benefit the timely introduction of judicial interpretations and case guidance systems c orresponding with the disregard of corporation personality.