The Study On The Applying Of Equitable Subordination Doctrine

When a company faces bankruptcy and the remain property is not sufficient to discharge all debts, the debts are discharged proportionally before the equities according to the bankrupt distribution's principles. When the dominant company use its power to deal with the debtor improperly and become the company's creditor, this creditor will be discharged proportionally in the bankrupt distribution with other common creditors, which will damage the common creditor' benefits. Equitable subordination doctrine is a relief measure to adjust this unbalanced benefit relationship. To ensure all debts are discharged equally, this doctrine discharges the whole or part of debts resulted from inequitable action after the other whole or part approbatory debts, or put the guaranty of a subordinate debt into the bankrupt property. In China, this doctrine is not accepted in legislation and judicature, and not mentioned with the disregard of the corporate entity as a relief measure to protect the creditors of the subsidiary. While, some related legal problems about the concrete applying and the adoption of equitable subordination doctrine in China are not mentioned. To fulfill the equitable distribution of all creditors, the author suggests that the Bankruptcy Law should adjust this unbalanced relationship resulted from improper action of the dominant company or the party associated with the subsidiary and protect the benefits of the common creditors. This article will study thoroughly the legal problems about applying the equitable subordination doctrine at the basis of investigating different areas's applying conditions.The body of the article has four chapters with sections in each, while the preface and conclusion have no sections. The main content of each chapter is the following: Chapter one discusses the basic theory of equitable subordination. This chapter mainly introduces the legal connotation of this doctrine, this legal foundation of this principle according to the basic principles of Civil Law, Contract Law, Bankruptcy Law and the values of this doctrine from three aspects: it embodies that all debts are equal, it fulfills the essential fair distribution of bankrupt's property, it maintains the system of independent corporate entity. Besides, this part discusses the differences between equitable subordination and the disregard of the corporate entity, concerted subordination, the repealing of contract, automatic subordination, which defines a specific studying object for the whole article. Chapter two investigates the applying conditions of equitable subordination doctrine at other countries and Taiwan district of China. This part examines the applying conditions of this doctrine in the USA, Canada, Britain and Taiwan district of China, and analyses these applying conditions comparatively. Equitable subordination doctrine appeared from the case law of the USA, and then adopted by Canada, Britain and Taiwan district of China. In Canada, the courts just considered applying this doctrine in limited areas, and there is not an explicit regulation about this. The Taiwan district of China set equitable subordination doctrine in the chapter of associated corporations of the corporation law, which is different from the USA. In Britain, there is no so called "equitable subordination", but the "no acting" has the similar legal effect with it. Chapter three analyses the basic legal problems about applying equitable subordination. This chapter investigates the protective range of this doctrine, the applying circumstances, applying factors, applying factors, applying means and legal effects, particularly discusses the applying factors in detail. Because there is no concrete applying standard in different areas, most of this content is the author's personal views at the basis of analyzing many related cases in different districts. Chapter four discusses the meaning of learning from equitable subordination in China. This chapter embodies the main purpose of studying the applying of equitable subordination doctrine. The author advises introducing this principle into the Bankruptcy Law through analyzing the necessity and feasibility of applying this principle in China to protect outside creditors' benefits effectively.