In my view a measure of adequate capitalization should be established by industry regulators, and should be flexible to changing institutional norms. When entities shift their practices to take advantage of capitalization requirements (such as taxi owners setting up a particular corporate structure), regulators should be able to quickly modify the capital requirements. This is what we saw, albeit too late, in the wake of the 2008 financial crisis, with regulators imposing far more stringent capital requirements on financial institutions.
Adequate capital should be determined neither at the time of trial, nor at the time of incorporation . Rather, it should be a requirement that regulators ensure is complied with. If a corporation fails to abide by its capital requirements, it should be fined or otherwise punished by regulators.
Difficulties arise when considering whether the corporate veil can be pierced to remedy thin capitalization. I support the view of Keating J. in Walkovszky v. Carlton, where he argues that this question is answered by considering whether a shareholder acted in good faith.
Although I agree that adequate capitalisation is best viewed as a constant requirement by which all corporations ought to abide, I believe that assessing it in such a way ma lead to certain complications. For example, it is not inconceivable that there will be certain periods in the life of a corporation where its capital drops precipitously, whether due to standard fluctuations in the business cycle, or even theft by its employees/directors. Is it in the public interest for regulators to penalize corporations for under-capitalisation in these circumstances, or would it be more appropriate to evaluate a corporations level of capitalisation at the moment when said capital is actually required?
Nick I 100% agree – any capital requirement should in an ideal world account for changing business cycle conditions and evolution of the corporation, and also allow for unforeseen events such as employee theft. How you place all of that in the hands of a regulator and expect them to enforce it, I don’t know, but I agree that it is a worthy objective.
I also agree that adequate capitalization should be required and regulated. However, I am not sure how this would be done given the constant variation in business conditions. Maybe it could be a yearly capitalization review at year end? It wouldn’t solve all the problems with thin capitalization but maybe it would be a start?