On The Application Of The Principles Of Equitable Subordination In Chinese Bankruptcy Law

In recent years,with the deepening marketization of China’s economy,a large number of enterprise groups have emerged in the market.The close relationship between the various companies within these enterprise groups has resulted in a large number of affiliated claims.Under the current provisions of the Enterprise Bankruptcy Law,these affiliated claims are on an equal footing with other ordinary claims and are paid on an equal basis.However,some affiliated claims of the controlling company are formed based on unfair acts,and such improperly affiliated claims undermine the rights and interests of the subordinate companies and other creditors,placing them on the same footing as ordinary creditors,further undermining the interests of ordinary creditors and aggravating the conflict of interest in insolvency.Therefore,it is necessary to make a distinction between the order of satisfaction of improperly connected claims and ordinary claims of the controlling company.The equitable subordination principle originated in the United States is to solve this problem,which advocates that improperly connected claims should be paid after ordinary claims,and it is of great significance to apply this principle in China’s bankruptcy law.The theory of equitable satisfaction and the theory of balance of interests can provide the legal basis for the introduction and application of this principle in China,while the theory of equitable subordination,the theory of partial subordination and the theory of the subject of internal associates can further lay the theoretical foundation for its application.From the perspective of necessity,in theory,the principle of equitable subordination has more advantages in bankruptcy law than the system of denial of legal personality,liability for damages for connected transactions,bankruptcy avoidance and invalidation system,substantive consolidation bankruptcy system and other systems with similar functions,and is more conducive to safeguarding the interests of creditors,thus balancing the interests of all parties and achieving fairness in bankruptcy.In practice,it is urgent and important to solve the problem of improperly connected claims against the interests of ordinary creditors,and the principle of equitable subordination has the advantages of wide application and low difficulty to solve this problem.From the perspective of feasibility,the typical cases issued by the Supreme People’s Court and the relevant case practice and trial documents of local courts have created a good practical environment for promoting the application of the principle of equitable subordination;at the same time,the principle can be symbiotic with company law and contract law externally and coordinated with other bankruptcy legal systems internally.Although the principle of equitable subordination has been developed in China and has taken root,there are still many problems in the process of its development and growth.On the one hand,there is no clear legal basis,the substantive elements are vague,and the determination of inequitable conduct and legal consequences are not very clear.On the other hand,the procedural elements are confusing,and the confusion with the commencement of the substantive consolidated bankruptcy system and the allocation of the burden of proof are also difficult to ensure fairness.In order to give full play to the effectiveness of the principle of equitable subordination in practice and to practice fair payment in bankruptcy,we should continuously improve its application in China’s bankruptcy law from both substantive and procedural perspectives,which can be divided into three aspects: firstly,we should clarify the applicable elements,including determining the applicable subject,defining the scope of conduct,and clarifying the damage results.Secondly,we should clarify the legal consequences,including improperly associated claims subordinated to payment within the necessary scope and limit the exercise of the right of set-off and other exclusion.Thirdly,the applicable procedures should be established,including the determination of the administrator as the subject of enforcement and the reversal of the burden of proof.