The Issue Of Creditor Involvement In Corporate Governance

The function of debt financing in corporate governance has been proved by economics through empirical studies.However,whether a creditor could interfere within the corporate governance when it facing the opportunistic behavior of the debtor company is still remained unsolved yet.By focusing on the indenture market,a core channel of debt financing,and combining with the current insufficient creditor protection in theonshore indenture market and the contractual instrument used by creditors in the offshore-debt covenants as the analysis path,this paper utilizes the research result of legal and economic area to analyze the utilization,function and validity of the debt covenant and attempt to deduce the possibility and boundaryof the creditor's interference into corporate governance.This paperanalyzes thissubjectin four chartersandan introduction and a conclusion.The introduction part mainly introduces the research purpose and the background of this paper.By introducing the current status of our country's indenture market development and the insufficient creditor protection,the necessary of studying debt covenantswas revealed.The first charter concludes andanalyzesthe foundationtheories as the relationship between the debt financing and corporate governance,the agency cost between debtors and creditors,and the studies of debt covenants,to discuss the necessity of creditor protection and the necessity of using the debt covenant as the instrument to protect creditors.The second charterfocuses on the details of debt covenants.The concept and the history of debt covenant reveal the phenomenonthat the debt covenant developed with the retreat of the legal protection to creditors,and increased with the risk of market and tied with the judicial opinion on them.Then,this charter discusses the specific terms of debt covenants(affirmative restriction terms,negative restriction terms,financialtermsand default terms).Withthe empirical study of the effectiveness in the use of debt covenants and the credited risk which had occurred in the onshore market,debt covenants show applicabilityand necessity in capital market.The third chapter discusses the validity of debt covenants in China's legal system.First,debt covenants shall be deemed as contract conditions to determine the effectiveness of default clauses.Second,this charter comes to identify the criterion for determining the validity of debt covenants,which shall be bound by the internal determine mechanism of the debtor company.Further,as to the validity conditions,the affirmative restriction terms shall be bound by the voting proportion inside the debtor company regarding to the specific items to be restricted,and the negative restriction terms shall obtain the proportion of votes regarding to issuing of indentures in the shareholders meeting of the debtor company.Although creditors could use the default terms to pressure the debt company thus interfere the corporation governance indirectly,the debt covenants could not and should not offer the legal rights to creditors to govern the debtor company.The forth chapter analyzes the possible pressure issue during the use of debt covenants.It discusses the circumstance regarding to the possible liability bore by creditors who de facto control the debtor company.By referring to the U.S cases,we could find that merely negative restriction does not construct a control relationship,but if a creditor actively and continually controls the debt company's business decisions beyond the financial decisions andwithout the purpose of protecting the creditor right and the advance consent of debtor,it may become the actual controller of debt company and shall bear the lender's liability.Base on the practice experience of U.S,this chapter further suggest that our country shall pay attention to such issue and builds its own criterion of lender's liability.In the conclusion,this paper concludes thatduring the period the debtor is not in financial distress or bankruptcy,the creditor could only use the debt covenants as the instrument to interfere corporate governance indirectly.And there should be lender's liability regarding to the over control of creditors in order to complete the mechanismof covenants protection.In the meanwhile,debt covenants improve the risk distribution and balance through free negotiation between creditors and debtors,which generate benefits to the market.Therefore,modernresearch of corporategovernance should realize the advantage of indirectly control by debt covenants and the indenture market of our country should incorporate such mechanism into current standard indenture contracts and the judicial system should prepare relevant interpretation and possible liability which may occur with the use of debt covenants.