Legal Capital Rules And Creditor Protection:Focus On 《Second Company Law Directive》 And 《Companies Act2006》

With the present worldwide financial crisis, protection of creditors has become aremarkably important topic. Legal systems all over the world contain special rulesdesigned to protect creditors adequately. Because creditors have no involvement in theadministration of the company, there is an agency problem that shareholders anddirectors may take opportunistic action which harms the interests of creditors. That isthe reason why company law should foster creditor protection. Conventional doctrineconsiders legal capital as an important and effective means of creditor protection. Thecore concept is that legal restrictions are imposed on corporate activity by reference tothe shareholders’ capital investment. Legal capital rules have traditionally been amongthe cornerstones of European Union Company Law. Generally, the Second CompanyLaw Directive has two main groups of rules. The first one aims at providing a“Umbrella” intended to help ensure that creditors are paid, even if the companysuffers substantial losses (minimum capital rules). The second group aims to set limitsto controlling shareholders’ opportunistic behaviour (capital maintenance rules).However, currently, these rules have been subject to criticism that being too rigid andexpensive, while offering little or no protection to corporate creditors. The purpose ofthis paper is to discuss whether, and to what extent, legal capital rules can still beviewed as a useful means of creditor protection. Accordingly, considering thesecriticisms of the legal capital rules, the paper attempts to suggest improvements onspecific provisions. At the same time, based on other mechanisms of creditorprotection and various systems applying in other country, the paper will introducealternatives of more effective creditor protection. The rest of this paper is structured as follows. Section one provides an economicanalysis of the Second Directive’s legal capital rules and Companies Act2006. It givesa description of the rationale of these rules, to explain how these rules may berationalised as creditor protection mechanisms. Section two then critiques theserationales. Not only do those rules have not significantly benefit creditors, but alsoburden companies with cumbersome procedures and costs. Section three analysesother mechanisms of creditor protection, including the rights of information,proprietary protection, contractual protection and director’s duty. Section fourcontains the core of the paper. It concludes with tentative proposals for reforms, and,also introduces alternatives of current rules.