Research On The Application Of Substantial Consolidation In Bankruptcy

With the advent of affiliated companies,the traditional legal system,especially the corporate legal system based on the limited liability system,has been impacted and challenged.The established balance and order have been broken,which has led to a series of legal issues,one of which is the bankruptcy of affiliated companies.In practice,measures are widely applicable to hear bankruptcy cases of affiliated enterprises,such as Enterprise Bankruptcy Law and Company Law.In Enterprise Bankruptcy Law,it includes bankruptcy revocation rights,bankruptcy invalidity system,and manager recovery rights,which are stipulated in Article 31,Article 32,Articles 33 and Articles 36.In Company Law,the personality denial system is often applied,which stipulated in Article 20,paragraph 3 of the "Company Law."However,all above provisions are based on the form of a single company.These rules still have many shortcomings in dealing with the bankruptcy cases of affiliated companies.As a solution of the bankruptcy of affiliated companies,the substantive consolidation system has emerged from the trend.To a certain extent,it has filled the gaps of traditional legal measures.Nevertheless,as a challenge to the traditional corporate law theory,it has no laws to follow.Therefore,the judiciary can only "cross the river by feeling the stones."In recent years,with the increase in the number of bankruptcy cases involving affiliated companies,its drawbacks have gradually emerged,as follows:(1)The applicable standards of the substantive consolidation system are too single to be abused;(2)The interests of some creditors have been unreasonably damaged due to the application of the system,but the law neither stipulate corresponding compensation rules nor even provide relief approach;(3)The specific details of the start-up mode and the main body of the substantive consolidation and insolvency proceedings are not clear.The existing practices are still to be studied in the determination of the competent courts and the choice of the bankruptcy administrator.In 2018,the "National Court Bankruptcy Trial Work Conference Minutes"(hereinafter referred to as "Minutes")put forward the principle requirements of "prudent application of substantive consolidation".The document stipulates that if there are bankrupt reasons for multiple affiliates but they do not meet the conditions for substantive consolidation,the people's court may coordinate the multiple insolvency proceedings according to the application of the relevant entity.The above provisions state that coordination of trials is an important way to reduce the number of substantive consolidation bankruptcy cases.However,the "Minutes" has very few provisions for coordinating trials.Therefore,accurately defining the coordination trial has become a major focus of this article.Based on the theory of substantive consolidation rules,this paper combines the judicial practice experience under the current legal norm system,expounds the feasibility,necessity and rationality of the application of the system in the current judicial practice,and finally constructs the framework of the consolidation and bankruptcy system of affiliated enterprises.Suggestions for the current three existing problems.This article has three main parts:The first part is the prudent application of substantive consolidation of bankruptcy.This section briefly introduces its origin,development process and basic concepts,and introduces its advantages and disadvantages by discussing the disputes into the system,and then shows the position and attitude of “prudent application of substantive consolidation”.The second part is about the problem analysis of China's bankruptcy practice.This section summarizes three specific issues,including single standard dilemma of application,incomplete program and the lack of compensation and relief mechanisms.In this paper,single standard dilemma of application is mainly to solve.The procedural norm only analyzes the two aspects of program initiation subject and the start-up mode.The compensation rules and relief mechanisms of the interests of related rights holders focus on the analysis of the main body of the system damage and the existing relief mechanism,in order to get the attention of legislators,the judiciary,and the academic and practical circles on the issue of interest balance.The third part is the improvement and suggestion of China's substantive consolidation in bankruptcy practice.This part limits the scope of application of the system to three categories: bankruptcy fraud of control-level enterprises,abnormal bankruptcy of tight-layer enterprises and implicated bankruptcy of semi-closed enterprises.Then put forward suggestions for improvement on the issues involved in the above three types of bankruptcy cases.