Application Of Right Of Set-off In Affiliated Enterprise Bankruptcy

Right of set-off bankruptcy refers that the debtor after the Declaration of bankruptcy andcreditors of the mutual debts in bankrupt enterprises have the right to offset its liability bydirectly using claim in bankruptcy rather than depend on insolvency procedure. This isChina’s current bankruptcy law on the right of set-off, but it is only for general corporateset-off in bankruptcy. In the process of bankruptcy liquidation affiliated enterprises, it is alsocommon to encounter the problems of affiliated enterprise right of set-off in bankruptcy.When the current bankruptcy law apply to the bankruptcy offset of the affiliated enterprises, italways appears to be inadequate, riddled with problems.The existence of affiliated enterprises has been so far too long. Many scholars have madea further study of the affiliated enterprise bankruptcy in recent years. They generally citedAmerican doctrine of piercing the corporate veil, deep-rock doctrine and substantiveconsolidation doctrine to standardize bankruptcy illegal activities. This paper attempts toapply these doctrines to the affiliated enterprise bankruptcy set-off system, specific provisionsfor affiliated enterprises which are different from that for the general corporate bankruptcyset-off, and strive to establish the perfect. This is the innovation of the article. Besides thepreface and the conclusion, the paper is divided into four parts. The main contents are asfollows:The first part is about the limitations of the system of bankruptcy set-off rights in solvingthe problems of affiliated enterprise bankruptcy. First, the current bankruptcy law on the theright of set-off has not met the needs of offset of affiliated enterprise bankruptcy, becauselegal provisions are too broad, and many provisions on offset are in form. If it can offset, thecurrent bankruptcy law does not involve. Second, from the point of view of particularity ofaffiliated enterprises, they are related, and existing form is varied. The controlling andsubordinate relation among affiliated enterprises leads to serious conflicts of interest amongthem, which not only damages the internal authority of itself, but also diminishes theauthenticity of discount debt formation among the affiliated enterprises. Third, from the viewof the causes of debt, debt of affiliated enterprises may issue from investment, financing,assets exchange and mutual guarantee. Controlled enterprise creditor’s rights is quite flexibleand convenient to. Controlled enterprise can use advantages that the general enterprisescannot have, to maximize compliance with its own interest in the debt set, in order to reduce credit risk. Fourth, from the protection of ordinary creditor’s interests, affiliated enterprisesmainly have the problems in personnel controle, hotchpot and business confusion, which is animportant manifestation of unfair connected transaction. All these problems must be gotstraight to curb the improper, illegal acts. Only in this way can effectively protect the commoninterests of creditors.The second part is about the principles applied to the affiliated enterprise bankruptcyset-off right. To make use of bankruptcy set-off right should follow the principle of fairnessand efficiency, the principle of honesty and credit, the principle of set-off right in bankruptcyand the company autonomy and the principle of essence and form. During liquidation of theaffiliated enterprise bankruptcy, whether debt can offset or not, and how to offset, are allproblems to solve in Set-off right. The principles provide the standard and basis for exercisingbankruptcy set-off rights.The third part is about conditions that the affiliated enterprises make use of bankruptcyset-off right. First of all, review the legitimacy and effectiveness of debt. Legal affiliatedtransactions has been recognized by the law, because it can promote the company to reducethe transaction cost, expand business scale, improve market competitiveness and otherfunctions. So debts resulting from legitimate transactions can be legally recognized; for theimproper affiliated transactions, it must be subject to strict regulation, because itfundamentally departs from the basic principles of market economy and damages the interestsof external creditors. Secondly, set-off rights must be proposed before the acceptance of thebankruptcy claims, and the debt must be valid before the acceptance of the bankruptcy claims.Thirdly, affiliated transactions among affiliated enterprises must develop affiliated transactionreport, which specify relationships and transactions for being examined in bankruptcy set-offand provide the basis for bankruptcy set-off, but also is open and fair requirements inbankruptcy procedures. Finally, this article elaborates feasibility of American Deep RockDoctrine and substantive consolidation doctrine in using Chinese affiliated enterprisesbankruptcy set-off references.The fourth part is about the limitations of making use of the affiliated enterprisesbankruptcy set-off right. Affiliated enterprises should not only comply with the provisions ofthe general corporate bankruptcy set-off, also meet some special restrictions. Such as:substantive limits; special agreement constraints; creditor’s rights enforceable restrictions;bankruptcy assignee shall not be offset; and being harmful to ordinary creditors creditor shall not be offset.