Research On Legal Problems Of Affiliated Enterprise Bankruptcy

In market-orient economy, companies tend to expand their scales and prolong their business chains in order to resist the risk and reduce the cost. In company forms, this tendency represents the development and mightiness of affiliated enterprise. From the angle of law, every member of the affiliated enterprise should be responsible for all its legal duties, because it is an independent entity. However, these members have profound economic relations. When such relations closed so much that it affected the independence of the enterprise, they bring up series of hard legal problems. Affiliated enterprise face up to many special problems which differ much from independent companies in bankruptcy. For example, affiliated companies have well-suited channels to transfer or transport interest between each other because they have controlling or great-affect relations. Thus, it is easier for affiliated enterprises to exercise false insolvency or fraudulence in bankruptcy to injure the creditors. The controlling company, as a creditor to the subordinative company, is very different from the common creditors from the born to the implement of the debts. When the subordinative enterprise go bankruptcy, if we overlook the particularity of credits of the controlling company and equalize them with the common credits, in some sense, the common creditors will be injured. When several members of the affiliated enterprise go bankruptcy in the same time, and the members had insider non-market estate flow, it is evidently unfair for the court to accept the case in the rule of independent companies, i.e. accept the case individually, and let members to pay the debts for their own. Chinese bankruptcy law is in shortage of special systems to solve the peculiar problems that bring out in affiliated enterprise bankruptcy. The present system solving the problems in the same way of the common enterprise should be improved. This paper has five chapters to discuss the problems of affiliated enterprise bankruptcy.First chapter, bring up the legal problems of affiliated enterprise bankruptcy. This chapter is aimed to analyze the concept and character of the affiliated enterprise, and the challenge of the affiliated relations among companies posing to the present company law and bankruptcy law. The concept of affiliated enterprise differs from different scholars. In my view, affiliated enterprise refers to a state of legally independent enterprise that united together through share-holding, contracts, or other controlling or great affect relations, or controlled by the same enterprise. Affiliated enterprise is a combination of several enterprise that is independent legal entity. They are legal entities but not necessarily legal person. Members of the affiliated enterprise have controlling or great-affect relations that probably have impacts on their willingness and behavior. In some case, such impacts make the member apart from their core-interest. The controlling or great-affect relations among enterprise should be stable and consistent and be a regular factor to control or affect the enterprise. Such relations provide the members with a channel to transit the interest between them and pose a great challenge to the present company law and bankruptcy law. The controlling and great-affect relations among enterprise distract the company from the independence of their willingness, property and responsibility. Further more, the member of the affiliated enterprise can not run normally under their inner framework and do business with partners by market rules. In bankruptcy procedures, special relations among affiliated enterprise afford many convenience for fraudulence and pose threats to the rule of equality of credits.Second chapter, the represent of legal problems of affiliated enterprise bankruptcy. This chapter mainly analyze the forms of affiliated enterprise bankruptcy and represents of affiliated enterprise bankruptcy fraudulence. The forms of affiliated enterprise bankruptcy including: (1)the subordinative enterprise goes bankruptcy while the controlling enterprise exists. (2)the controlling enterprise goes bankruptcy while the subordinative exists. (3)both the controlling and the subordinative go bankruptcy. (4)one of the enterprise that under the control of the same enterprise goes bankruptcy or both of them go bankruptcy. (5)the bankruptcy of multinational enterprise. The breach of law in affiliated enterprise bankruptcy includes false bankruptcy and bankruptcy fraudulence. False bankruptcy refers to the fact that affiliated enterprise push its member which does not reach the limit of bankruptcy to go bankruptcy in order to escape from debts or get unlawful interest by conceal the real facts or make-up facts of the enterprise. Bankruptcy fraudulence refers to the facts that affiliated enterprise viciously infringes the creditors in normal bankruptcy procedures. The controlling enterprise may take unlawful profits by setting up subsidiary companies and push them to bankruptcy. Members of affiliated enterprise have chance to despair the creditors by concealing, transiting the assets, making-up debts, accepting the falsehood debts, volunteer acts, unfair affiliate transactions, favorable discharge, illegal vouch, and so on.Third chapter, the international legislation on affiliated enterprise bankruptcy. This chapter introduces the systems of affiliated enterprise bankruptcy in the US., Germany, Japan, and Taiwan district. U.S. cases develop many rules in resolve the problem of affiliated enterprise bankruptcy, such as piercing the corporate veil, deep-rock doctrine, substantive consolidation doctrine, and fiduciary duties of the controlling shareholders. Piercing the corporate veil refers to the case that the court renounce the rule of independence of the company and shareholders, employing the controlling shareholders to take responsibility of the creditors of the company but not bound by their investment in order to protect the creditors. Deep-rock doctrine refers to the case that if the parent company is in shortage of investment and at the same time control of the subsidiary company to work for her interest, when the subsidiary company goes to bankruptcy or in reorganization, credits of parent company should be inferior to preferred shareholders. Substantive consolidation doctrine refers to the case that when several members of the affiliated enterprise go bankruptcy at the same time, court should consolidate the assets and debts of these members and distribute the assets in the proportion of the amounts of credits. Fiduciary duties of the controlling shareholder include the duty of care and the duty of loyalty. In Germany, the legislation regulates the type, set-up, alteration, ending, management, duties of the affiliated enterprise in detail by a specific chapter. The law also put the responsibilities of information opening, fiduciary, compensation to affiliated enterprise to standardize their inner management system. Although such system is not specifically set up for affiliated enterprise bankruptcy, the regulation enforces the responsibility of the controlling company and enlarge the rights of creditors, and thus when affiliated company go bankruptcy, such rights may be their weapons. In Japan, the legislation also regulates the responsibility for the affiliated enterprise includes information opening-up, auditing of affiliates, fiduciary duties of the directors, and so on. In Taiwan district, the legislation developed new systems on the ground of Germany law. It established a relatively perfect system for affiliated enterprise, including the rule for the subsidiary company to ask compensation from the controlling company and its managers, or compensation from the beneficiary subsidiary, the subrogation rights for the creditors of the subordinative company, equitable subordination, the opening-up of investment, and so on. It has sameness and difference in the two systems on solving the problems of affiliated enterprise bankruptcy. The common law emphasize particularly on specific system in judicial practice while the statute law emphasize on the regulation of affiliated enterprise and prevent from the infringement.Fourth chapter, Chinese present systems on resolving the problems of affiliated enterprise bankruptcy. This chapter mainly analyze the present systems in our legislation and point out its limitations. Chinese law did not develop a wholly system on affiliated enterprise. The offensive acts in affiliated enterprise bankruptcy was regulated by renouncing the company's legal person, repealing rights and invalidation systems in bankruptcy. Renouncing the company's legal person can not stop the fraudulence in bankruptcy in the case that affiliated enterprise is formed by contracts, and fail to pose the responsibility to the real controller who has no identity of a shareholder. Repealing rights and invalidation system in bankruptcy exert great function in solving the problems of affiliated enterprise bankruptcy, while they have limitations in duty body, implementation, and the course.Fifth chapter, conceive about our affiliated enterprise bankruptcy system. This chapter put up with my ideas and suggestions on our legislation about affiliated enterprise bankruptcy. In my view, our affiliated enterprise bankruptcy system should include three parts: First, the prevent system centered about information opening-up and controlling shareholder's fiduciary duty in affiliated enterprise. The purpose of this part is to make special rules for affiliated enterprise, endowing legal duties to the controlling company and preventing the problems. The second part, the system for solving the problem centered on piercing the corporate veil and supplemented by doctrine of equitable subordination and substantive consolidation. Renouncing the company's legal entity has been regulated in our new corporate law, but it should be improved so that it can be applied to affiliated enterprise in any situation. The other two rules were born in judicial practice with rational facts. So, Chinese law should take in their logical parts and solidify them in our legal system. The third part is the liability system for affiliated enterprise centered on the compensation responsibility for controlling company. The content of this part should be included in corporate law, bankruptcy law, and penalty law individually. The main idea in this part is to make it clear that the legal responsibilities of the controlling enterprise and its managers when they abuse the controlling power. The hand of the law may catch the real offender behind the veil of affiliated enterprise and expose them in the sun.