Research On The Subordination Of Shareholders’ Claims In Bankruptcy

The inferior liquidation system of creditor’s rights of shareholders refers to the system of placing the order of unjustified creditor’s rights of shareholders after ordinary creditor’s rights in bankruptcy liquidation for the interest of fairness.In the operation of market economy,when a company run into financing difficulties,one of the most important ways of obtaining financing is to get loans from its shareholders.In bankruptcy,since the creditor’s rights of shareholders may have the advantage of being claimed along with that of external shareholders,some shareholders may hold the improper control or provide loans to companies for transferring investment risks on purpose,so their real intention is in in doubt.In the stage of bankruptcy liquidation,malicious shareholders’ providing loans will damage the interests of the company and other creditors.At present,China lacks relevant regulation regarding the inferior liquidation of creditor’s rights of shareholders,and the judicial decisions of relevant cases are not consistent,so the order of liquidation shareholder’s claims is disrupted.In addition,the system of Disregard of Corporate Personality is too strict,which is easy to over correct in standardizing creditor’s rights of shareholders.In addition,the bankruptcy revocation system and bankruptcy invalidity system have some limitations,and issues of the narrow management boundary of the bankruptcy administrator and the uneven distribution of the burden of proof are also the obstacles to determine the order of the liquidation of creditor’s rights of shareholders.This paper summarizes the existing views and theories on the inferior liquidation of creditor’s rights of shareholders.The Equitable Subordination Rule in the United States is that when the bankruptcy property is distributed,the order of claims of the associated company of the debtor,as the creditor,will be delayed after other creditors due to its significant shortage of capital contribution.This paper analyzes the guiding case of the supreme law"the lawsuit of Shagang company against Kaitian Company for objection of distribution",and comes to the conclusion that the Equitable Subordination Rule should not be applied to the cases of capital shortage and that it is not necessary to introduce the rule in the Bankruptcy Law in China,thus highlighting the necessity of establishing the inferior liquidation system of creditor’s rights of shareholders.Firstly,the principle of fairness,prudence and flexible should be cleared defined of the inferior liquidation system of creditor’s rights of shareholders.The controlling shareholders,actual controllers,associated enterprises,the directors,supervisors and senior managers should be regarded as the inferior subjects to determine whether there’s any behavior of significant capital deficiencies,abuse of controlling rights and the violation of fiduciary duties and consider the degree of damage before deciding the inferior creditor’s rights of relevant shareholders.Secondly,in order to balance the interests of all parties,the unjustified creditor’s rights should be at the bottom of the inferior creditor’s rights,and the shareholder’s right of recovery,right of set-off and right of exclusion should also be limited.Moreover,the subject of obligation should also bear heavier burden of proof in litigation.