Study On Relevant Legal Problems Of "Deep-Rock Doctrine"

The "Deep-Rock Doctrine" is originated from a judicial precedent in U.S.A, which is a principal in processing the parent corporation's rights as a creditor during the bankruptcy process of its subsidiary corporation. The substantial spirit of the Doctrine is consistent with the legal system of affiliated enterprises, and it can play an indispensable role cooperating with other regulations. The Doctrine is of referring significance in dealing with the real problems existing in China such as the usurpation of affiliated corporations' assets by their parent corporations through creditor's rights, which will damage the other creditors and other shareholders of the subsidiary corporations in turn.However, the existing studies on associated companies and "Piercing the Corporate Veil" theory focuses mainly on relatively macroscopical areas including the introduction of relevant theories, the necessity, significance and feasibility of establishing such legal systems in China. As to "Deep Rock Doctrine", it was always just mentioned when talking about the "Piercing the Corporate Veil" theory. There is no profound and special research on the problems concerning utilization such as the degree, condition and result of the subordination of parent corporation's obligatory right, ihe particular disposal measures and procedures, the disposal principals for different kinds of obligatory rights, and the amalgamation into the existing legal system, etc. Now there is almost no contradiction on the necessity of, the import of "Deep Rock Doctrine". Meanwhile, the active attitudeof the judicial authority has been manifested in the " Regulations on Some Problems Concerning the Judgement of Corporation Entanglement Cases (Part 1) (consultation edition)" that was publicized by the Supreme Court. However, since the "Deep Rock Doctrine" is originated from the case law of the common law system, once it was imported, it is to be resolved that how to embrace it into the existing system of law of obligation in order to ensure that it can coordinate with the existing civil law system in China theoretically, and be applicable practically. Therefore, on the basis of the existing research, the deficit and unsolved problems are analyzed and reasoned in this essay, aiming to do some benefit for the theory and practice.The body of the article has six chapters with sections in each, while the literature summarization and conclusion parts have no sections. The main content of each chapter is the following:Chapter one "Guiding Statement" is divided into three sections, mainly introducing the origination and development of the "Deep Rock Doctrine", the referring significance for Chinese law, and the demarcation of the scope of the relevant problems involved in the essay, to decide the boundary, object and keynote of the essay. "Deep Rock Doctrine" is originated from the Taylor v. Standard Gas & Electric Co. case by the Federal Supreme Court of U.S. A in 1939. It's a instructive attempt by the court of chancery on the discharge of obligatory rights between parent and subsidiary corporations, which bases on the conception of equity and justice. It has been used for reference by the countries of continental law system throughout its developing process, and it will be instructing in Chinese judicial practices, too.Chapter two "Basic Theoretical Issues". Firstly it was defined that the "parent corporation" in this essay is refer to "the corporation holding the majority or all of another corporation's shares directly or indirectly". Meanwhile, becauseof the independent legal entities of the parent and subsidiary corporations, different kinds of obligation relationship can exists between them, without difference with other main bodies on the tenable conditions. As to the effective essentials, the parent corporation couldn't claim any obligatory rights to the subsidiary corporation until it thoroughly fulfilled its obligation of providing funds and complied with the associated trade regulations.Chapter three "The Confliction And Coordination Between The Parent Corporation's Obligatory Rights And Other Creditors' Rights". The interests balance points would be different depending on the various conflicting situations of the obligatio ex contractu and the obligatio ex delicto to the parent corporation and other creditors. The various situations are analyzed by the method of classification, and the conclusions are: generally speaking, any kind of obligatory rights of the parent corporation should in no case be prior to the infringed party's claim; when other creditors claim the contracted rights, the parent corporation's obligatory rights should be processed depending on the circumstances, that is, its contracted rights should be validated by each criteria after they were classified as secured claims, accommodation claims, liquidated damages or obligatory rights erected within a certain period before the subsidiary corporation's bankruptcy; even its claim for compensation for damage should be required for heavier burden proof on it to determine whether its claim should be subordinated for the protection of other creditors' lawful rights. Meanwhile, the economic rationality of the infnnged parties' claims' priority to all of the obligatory rights claims by parent corporations is argued in this chapter by using the method of the economic legal studies.Chapter four "The Confliction And Coordination Between The Parent Corporation's Obligatory Rights And Other Subsidiary Corporation's Shareholders' Rights". The basic standard to determine whether the preferred shareholder's rights should be prior to the parent corporation's obligatory rights isthat whether the shareholder has voting power when the parent corporation's rights came into existence. Because of its relatively underprivileged status in the administration and management of the subsidiary corporation, it is reasonable that the preferred shareholders without voting power should enjoy more protection during the procedure of the subsidiary corporation's bankruptcy, which means that it should enjoy preferential payments when qualifies to the effect conditions of "Deep Rock Doctrine". Generally, the common shareholders with voting power could not enjoy this preference, while they can seek for other ways in the corporation law system to protect their own rights and interests.Chapter five "The Restrictions On Parent Corporation's Obligatory Rights During the Bankruptcy Process of The Subsidiary Corporation" is thecore part of the essay. The detailed regulations and process procedures of "Deep Rock Doctrine" are discussed in this chapter by the methods of case study, economic legal study and foreign law contrast. The different situations of the parent corporation's rights during the subsidiary corporation's bankruptcy process such as the claim to set off, resume right, preconsideration, exemption, subordination and invalidation are all analyzed. And the conclusions are: Firstly, because of the particularity of the right to set off in the bankruptcy procedure, the parent corporation shouldn't claim to set off during its subsidiary corporation's bankruptcy process. Moreover, its secured claims and other preferred claims should be examined whether they have to be restricted. Nevertheless, since the formation of business conglomerate is the outcome of the accommodation to economic development, and the parent corporation is not always need to damage its subsidiary corporation in order to make profit for the conglomerate, the parent corporation's obligatory rights could only be subordinated equitably after examination instead of being subordinated without discrimination. The conditions to subordination include: malice, behaviors breaching its fiduciary duty, the damage caused to the subsidiary corporation or the creditor in turn, the cause and effect relationship between its behaviors and the damage. Therefore, the parentcorporation may be exempted from subordination of its rights by testifying its good intention. On the other hand, the parent corporation's right to repossess its property could be restricted if the property confusion between it and its subsidiary corporation is sufficient to cause other creditors' misunderstanding. Furthermore, The parent corporation's claim should be denied if it hasn't provided enough funds. Generally, "Deep Rock Doctrine" can be applied to sister corporations or individual controlling shareholders, while other factors concerning the particularity of the creditors should be considered. But the further discussion is impossible because of the limitation of the essay's length.Chapter six "The Amalgamation and Coordination of The "Deep Rock Doctrine with The Existing Legal System in China". The legal foundations of "Deep Rock Doctrine" are the principle of prohibition of abuse of right, the principle of honesty and good faith, the principle of consistency of rights and liabilities, the principle of fairness. The Doctrine is of great significance in achieving the equitable discharge goal of the bankruptcy law. Therefore, it not only doesn't conflict with the principal of equality of obligatory rights, but also incarnates the civil law principles of higher rank in the particular situation. The Doctrine will be confronted with the problem after its importation that how to coordinate with the existing law system in China, including many departments of law such as contract law, corporation law, bankruptcy law, civil procedural law, tax law, antitrust law, labour law, environment law, etc. Legislation recommendations are raised for improvement after the comments on the regulations in the existing judicial interpretation (consultation edition) as follows: Firstly, the special chapter for associated companies should be added into the "Corporation Law" to provide the basic legal premises for the application of "Deep Rock Doctrine". Considering the unity of the bankruptcy procedure, the main procedural regulations should be embodied in the "Bankruptcy Law", coordinating with other departments of law to form a regulation system, which based on the "Corporation Law" and "Contract Law", mostly embodied in "Bankruptcy Law" with special regulations in law ofsociety such as "Labour Law", safeguarded procedurally by "Civil Procedural Law".