On The Protection Of Creditors In The Reform Of Corporate Capital System

The independent personality and limited liability of company has ensured that shareholders can seek financing through such a kind of business organization so as to raise the essential capital during its establishment and operation. However, this has also led to conflicts of interest between shareholders and creditors, with the latter bearing the relevant cost incurred by the negative externality, and such an agency cost issue cannot be completely solved by creditors’ self-help. Traditionally, legislators tend to rely on the strict system of corporate capital to protect creditors’ interest, but more and more scholars have begun to reconsider the actual effects of the system, and the legislative practices at home and abroad have also reflected the trend of tempering corporate capital system.Based on China’s latest reform of corporate capital system and with U.K. company law as reference, this paper begins with the background of the problem of creditor protection, analyzing the protection methods under capital formation and capital maintenance respectively, and trying to find out other methods other than corporate capital system on which the creditors can rely.Apart from the Introduction and Conclusion, this paper is divided into four chapters.Chapter I summarizes the theories which are closely related to the thesis. The characteristics of independent personality and limited liability generally established by company law have inevitably led to a higher level of agency cost of debt. Since creditors cannot acquire full protection through self-help, it is necessary for organizational law to step in. In addition, both the recent reforms in China and U.K. have followed the trend of tempering corporate capital system.Chapter II mainly discusses the creditor protection issue under the principle of capital formation, which is also the focus of China’s reform in 2013. On one hand, this paper affirms China’s abolishment of the minimum capital requirement, holding that this rule cannot offer effective protection to creditors as expected and that getting rid of path dependence will further increase motivation of public investors. On the other hand, this paper believes that the diversification of consideration received upon issue will be an inevitable trend in the near future, and the rules concerning the valuation of non-cash consideration shall be improved to further ensure the adequacy of capital contribution by shareholders.Chapter III mainly analyzes the creditor protection issue under the principle of capital maintenance. Since China has abolished the minimum capital requirement and has carried out the fully-subscribed capital system, this paper believes that the legislation shall pursue the principle of capital maintenance more strictly so as to guarantee that there is no improper outflow of the corporate asset which will be used to repay creditors. Furthermore, this paper focuses on the loopholes of creditor protection under the current framework of distributions and capital reduction, and offers legislative proposals accordingly in order to alter the status quo of looking at form rather than substance.Based on the analysis above, Chapter IV indicates that China shall gradually establish and improve a multidimensional system for creditor protection. Combining the inclination of China’s current reform with the features of U.K. company law, this paper chooses to further analyze the ex ante method of information disclosure and the ex post method of director responsibilities.