Business & Corporate
By Rayan F. Coutinho
Inadequate capitalization is one of the factors considered by courts in piercing the corporate veil and holding a parent corporation liable for the debts and obligations of its subsidiary corporation. “Inadequate capitalization” for the purposes of piercing the corporate veil, is defined as capitalization that is very small in relation to the nature of the business of the corporation and the risks the business entails.
It is well established in Ohio that a parent corporation may be held liable for the debts and obligations of its subsidiary if the subsidiary was undercapitalized when it was formed. For example, it has been held that where a parent corporation with a stated capital of $800,000 leased millions of dollars worth of ships to a subsidiary which had been incorporated with a stated capital of $10,000, the parent was liable for the subsidiary’s breach of a shipping contract with a third party.
The question is whether inadequate capitalization is measured at the time of formation alone or at any time during the existence of the subsidiary. The adequacy of capital is to be measured as of the time of formation of a corporation. If a subsidiary corporation, when formed by its parent entity, was endowed with stated, paid-in capital which was reasonably adequate to enable it to operate its business and pay its dues as they matured, the parent cannot be subjected to liability for the subsidiary’s obligations merely because intervening, unforeseen economic factors make it impossible for the subsidiary to meet its obligations.
admin @ December 26, 2007
