Effective Creditor Protection in Private Companies: Mandatory Minimum Capital Rules or Ex Post Mechanisms?

Abstract

Some jurisdictions have traditionally taken the view that minimum capital requeriments are efficient means of creditor protection and they are the price to pay limited liability. It is submitted that such ex ante mechanism would prevent the creation of undercapitalised companies that would shift the risk of a firm to creditors. Accordingly, those jurisdictions are in favour of maintaining or even strengthening minimum capital. However, other jurisdictions were never impressed by minimum capital rules, instead providing ex post rules to protect creditors without creating barriers to entrepreneurship. Minimum capital would thus be costly and superfluous. Minimum capital rules are nowadays under fire. The ECJ decisions in Centros, Uberseering and Inspire Art have reintroduced a debate that has apparently been settled in the context of public companies both by the 2nd Directive and the Winter Report. Nowadays the contention is however one of supreme importance since Member-States are still able (not) to impose such requeriment private companies. In fact, one should bear in mind that private companies are usually tailored SMEs, which typically may suffer from capitalisation problems. Those problems are especially acute in times of recession, such as those started in 2007 due to the financial crsis and following credit crunch. The issue is also being discussed at Community level due to the proposal the Societas Privata Europeae and in major jurisdictions in context of company law reforms. Rules, especially if mandatory, should only be imposed where benefits of having them in place outweigh the inherent costs as a whole. This paper will examine the rationales of a minimum capital rule contrasting them with the benefits of devices deployed by jurisdictions where no such requeriment is imposed. Accordingly, Part I will deal with both the rationales and shortcomings of minimum capital requirements, whereas Part II will explain how creditors can be protected without a minimum capital mechanism and which ex post mechanisms are put in place to compensate for the lack of such requeriment. Part III will then take account of present and future trends felt in jurisdictions that traditionally viewed minimum capital as an effective protection to creditors. Finally, it will be concluded that minimum capital rules do not offer substantial protection to creditors and are thus a superfluous and unjustified restriction to private autonomy. It will be stressed that jurisdictions should rather discuss the strength of their ex post mechanisms as a means of creditor protection. Hence, the contention should not contrast ex ante with ex post approaches, but rather weak ex post with strong ex post mechanisms.