Research On The Subordination System Of The Controlling Shareholder's Claims

Based on the controlling shareholder's particularity of identity and the control right of the company,the legitimacy of its claims for the company is suspicious.At the same time,for the ordinary creditors of the company,the degree of understanding of the company's internal information clearly cannot be compared with the controlling shareholder,if the controlling shareholder abuses its control right to obtain benefits from the company,the realization of the ordinary creditor's claims will be harmed.As the types of modern companies are increasingly diversified,companies are united to form a corporate group to more efficiently achieve resource integration and mobility to maximize profits.In the course of normal operation and existence of the company,since the creditors cannot know all the details of the trading activities within the company group,if the company is on the verge of bankruptcy,and the controlling shareholder of the company,which has the advantage of control right and being the insider,asks for the equal realization with the ordinary creditors of the company,the principle of fairness will be clearly violated.To solve this problem,the introduction of the subordination system of the controlling shareholder's claims is appropriate,which is designed to subordinate the claims of the controlling shareholder and make the claims be paid after the company's ordinary creditors,to remedy the ordinary creditors for being harmed by the inequitable behaviors of the controlling shareholder.The Supreme Court published a classic case in 2015,referring to the issue of the subordination of the shareholder's claims,which was worthy of our research.According to this,a comprehensive research and analysis on the subordination of the controlling shareholder' claims will be studied,hoping to benefit the judicial practice.The main contents and structure of the paper are as follows:The first chapter introduces the absence of the subordination system of the controlling shareholders' claims in China.This paper briefly introduces and analyzes the classic case published by the Supreme Court and the particularity of the controlling shareholder' claims and the necessity of introducing this rule,e.g.the introduction of the rule can restrict and prevent the abuse of the control right of the controlling shareholder,regulate the transaction between affiliated enterprises,protect the interests of corporate creditors,and compensate the shortage of disregard of corporate personality system in practice.The second chapter introduces the origin and development of this system.It's originally derived from the “deep stone case” of the United States.After a series of rules of the court,this system has been improving and ultimately was stipulated in the federal code of the United States.The third chapter is the key of this paper,which redefined and analyzed the application elements of the subordination of the controlling shareholder' claims by introducing and analyzing the United States case law and Taiwan legislation in order to make a contribution to introducing this rule to China.As to the applicable subjects,although most domestic scholars focus their study of the applicable subjects on affiliated companies and parent-subsidiary Companies,in consideration of the substantive fairness,as long as the control right is used to the unfair behavior and causing damages to the interests of creditors,in principle,the subjects who use this control right shall be included in the applicable subjects of this rule.The controlling shareholders have the fiduciary duty and are the main applicable subjects.In addition,in consideration of the controlling power,the company's actual controller and sister company may also be the subject of responsibility for the rule.As to the elements of behavior,the core lies in the "inequitable,improper" behaviors.In the United States case law,the inequitable behavior is a vague concept.The courts and scholars are all trying to classify the inequitable behaviors.This paper focused on the three inequitable behaviors which are undercapitalization of the company,shareholders' fiduciary duties and commingling or shuttling of assets,and also analyze the possibilities and scope of its application in China.The consequence element should be strictly limited and certain conditions shall be satisfied which is that the controlling shareholder of the inequitable behaviors have caused damages to the company's ordinary creditors and the subordinated claims shall be only within the scope of damage to the creditors.If the general misconduct of the controlling shareholder does not cause damage to the interests of the creditors,the creditor does not have the legal position to regulate and correct the behavior of the shareholders and there is no corresponding applicable space for the rule.The fourth chapter analyzes and discusses the distribution methods and the burden of proof of the rule.The controlling shareholder's claims shall be distinguished based on the principle of compensation and the principle of substantive fairness.If its inequitable behaviors cause damages to the company's ordinary creditors,then this part of the claims should be subordinated.The distribution method may refer to constructive distribution rule proposed by Professor Robert Clark.According to this,the result of the distribution is always equitable and reasonable no matter the shareholder's reasonable claims is lower or higher than the inequitable claims.And for the burden of proof,since the controlling shareholder has control right of the company and better understanding of the company's internal affairs which cannot be acquired by the outsider of the company,it is appropriate for the controlling shareholder to take the responsibility of burden of proof to justify there are no misconducts of him in the transactions with the company based on the principle of “parity of authority and responsibility”.