Priority On The Protection Of Creditor's Rights In Company Law

This article is devoted to answer one question concerning corporation law policy: the significanceof creditor's rights in corporation legal system. This article neither focuses on whether theshareholder standard or the creditor standard shall be applied in corporation law, nor is it going todiscuss whether creditor enjoys priority over equity in the regime of corporation law. This articletries to demonstrate on the level of corporation law policy, which one is of supremacy: protectionof creditor or protection of equity. It is not the article's intention to display the concreteregulations of creditor's rights in corporation law, but to reclaim the theoretical background ofthose regulations by systemize the pertinent stipulations.This article analyzes the question that the status of credit protection in corporation law systemfrom the prospects of ought-to-be and is-to-be, i.e. in the prospects of jurisprudence of corporationlaw, to discuss the ought-to-be statue of credit protection in corporation law system, and from thepoint of positive law to unscramble the reality of credit protection in the present corporate lawsystem. This article comes to the conclusion that credit protection should be placed in priority incorporation law system, and this priority is approved in the present legal regime, which is also thebasic proposition of this article.Before demonstrating the forgoing proposition, this article depicts the rising scene of the conceptof creditor's rights in corporation legal frame in the author's eyes. The scene is chiefly composedof several pictures. The comparatively old theory, raised by Japanese scholars, states "the priorityof creditor's rights in modern law". More recent theories include the theory of related person,social responsibility as well as negativity of shareholder. These theories have challenged theposition of equity in corporation legal system. Among these theories lies the most powerful scenewhich is known as the theory of corporation contract. This theory regards corporation as a rally ofcontracts. This theory not only wavers the civil law doctrine: the rigid distinction between subjectand behavior, but also blurs the distinction between credit and equity in corporation legal regime.Logically speaking, to delineate the position of creditor's rights in corporation legal system, onequestion should be settled at the first place. That is the significance of corporation law in theprotection of credit. In another word, why the non-corporation law regimes, such as contract lawor guarantee law are not able to provide a thorough protection for corporation credit? Howcorporation law shall compensate this gap? It should be born in mind that although contract lawtogether with guarantee law have built up a fundamental protecting system for corporation credit,they merely respond to the question concerning the rights and obligations of creditor as well ascreditors in a general sense without taking one element into account: the social status of creditorsand creditors. Those non-corporation laws, attributed to their standard of legal function, do notanswer the question: the obligation of corporation against creditor and the obligation ofshareholder as well as director against creditor are related to the creditor's social status.Corporation law can and shall insert more strength into this area. In fact, non-corporation lawregimes do not provide complete protection for corporation credit. The protection of corporation'scredit relies largely on corporation legal frame. Furthermore, corporation legal system offersdistinct protection from credit law for corporation credit. Corporation law requires that in certaincircumstances shareholder and director are responsible to corporation credit. This has transcendedthe credit relativity principle. Giving corporation credit such advantageous protection, to somedegree, has demonstrated the priority of creditor's rights under corporation law.It is beyond doubt that corporation law is determined to protect both rights of shareholder andcreditor's. The problem is the order of these two protections. If corporation law takes shareholderstandard, does it mean that the equity protection is preferred compared with creditor's rights undercorporation legal policies? The basic point of view explained in this article is that creditor's rightsshall be preferred. This proposition can be established by discussing the pillar position of creditrelation, creditor's outsider status and the fairness of risk allocation. The corporation aims atmaking profits. That is to say, the corporation obtains profits in return for exchanging commodityand service. One can also paraphrase that the destination of the existence of a corporation is toexchange and exchange, in a legal sense, is the establishment of credit relation. Therefore, it canbe extended further that the existence of corporation is for the sake of producing credit andcorporation exists because of credit. Besides, the founding and running of corporation cannot bepealed off from credit relation. From the prospect of shareholder, since the shareholder is alsowilling to make profit, the equity is founded on the base of credit relation. Thus, credit relation isthe pillar in the operation of a corporation. Hence credit relation---the pillar shall be protected atthe first place in corporation legal policy. Since the realization of shareholder's equity rightdepends on the corporation credit relation, shareholders shall not in the purpose of obtainingequity right infringe the right of creditor's. On the other hand, the priority of credit or equity is aproblem that how to balance the safety of transaction and the safety of investment. All creditors,the outsiders compared with shareholders, are unable to participate in corporation governance.Though minority shareholders, in practice, can hardly be involved in corporation governance,creditors are still in outsiders compared with these minority shareholders. Those negativeshareholders can rely on shareholder schemes or corporation governance policies and claim theirrights. However, these remedies are not available to outsiders such as the creditors. Under thiscircumstance, the priority of creditor's rights is necessary and fair.Now, let us probe this question from the angle of fairness of risk allocation. It is self-apparent thatcreditor's rights shall enjoy priority concerning the risk allocation between creditor andshareholder if the following elements are taken into account: shareholder enjoys limited liabilityprotection;shareholder is able to set up number of shares which he is willing to invest andtherefore decides his power on controlling the corporation;the risk brought by corporationgovernance system in modern time which is based on the limit liability of shareholder. To avoidthe misuse of limit liability scheme which can disperse investment risk, credit should be put in anadvantageous position. On the level of corporation legal policy, the priority of credit shall beregarded as the balancing effort taken by corporation laws against shareholder who shoulders limitliability.The different creditor protection frames are observed and compared under continental countriesand Anglo-Saxon countries from empirical and comparative prospects. The evaluation work showsthat German, Japan, France, the U.K., and the U.S., differ obviously from each other in area ofcreditor protection. In all, continental countries are characterized by pre-protection, administrativeinterference and solid protection;whereas Anglo-Saxon countries are known for theirpost-protection, judicial remedy, disclosure of information and liquid protection. Generallyspeaking, these two legal systems are different in nature. However, this article holds that theydiffer only technically. Behind these differences lies the same attitude that credit is of priority. Inthis sense, the corporation laws in all nations are "Liyifenshu".This article also empirically analyzed the priority of credit from three points: capital system ofcorporation, disclosure of corporation affairs, and establishment of corporation as well asalteration of organization.Capital system as the kernel of corporation legal frame, demonstrates that the consideration paidby shareholder in return for limit liability. To some degree, capital system is deemed to be theliability structure and system designed for shareholder and creditor. The principle of capitalascertainment is characterized on system level by investment. This is the first protection providedby corporation laws for creditor and it is one requisite for investor to involve into corporation. Thecapital system inevitably bestows credit priority. The alteration of capital is closely related to thereimbursement ability of corporation verse outsider. Therefore, it is necessary to consider creditbefore the capital alteration. The principle of maintaining capital guarantees that corporation hasthe ability to payoff credit, prohibit corporation managers from illegally utilize corporation assetsand provide real pre-protection for creditor as well as latent creditor.During the course of corporation operation, creditor is outsider who far less informed thanshareholder. The disclosure of corporation affair is a respond to it. The transaction safety isensured by information disclosure which composes a crucial factor in creditor protection.Information disclosure includes public notice system of corporation registration and thepublication of important issues concerning corporation operations. The registration of corporationestablishment, dissolving, nullification, the disclosure of corporation's entering into importantcontracts, significant alterations in business, important investment, credit and security, great lossin corporation assets, crucial suits relative to corporation, alterations of corporation article,increase and decrease of corporation capital, alteration of shareholder's equity, merger andseparation, and the alteration of director and high level manager are all embraced under the systemof information disclosure. These schemes can provide pre-alert to creditor and latent creditor.Depending on these policies, creditor is able to maintain information of corporation and decidefurther investment.Corporation is a splendid invention of human being. It is a man-made organization whoseestablishment and nullification are under the control of human. The establishment and alterationare intimately related to creditor protection. Regards the initiating corporation, in whichshareholder's status is not yet settled, creditor is protected by partner system and generalresponsibility system. Therefore, it is obvious that creditor's rights is under the spotlight. In thecircumstance when corporation separates, creditor protection can be divided into two categoriesaccording to time: pre-protection and post remedy. Pre-protection regulates that corporation shallmake public notice concerning separation issues and creditor is legally bestowed to raiseobjections. With these two instruments, creditor will not sacrifice. Compared with pre-protection,post-remedy is, to some extend, negative. It is also notorious because of its high cost and lowefficiency. However, it is still necessary to carry out post-remedy for those creditors who do notrealize their rights or who are not treated in good faith during corporation separation. One of themost important post-remedies is nullity action against separation. Speaking of merger, because lawgives creditor right of information and objection, creditor is better protected under pre-protectionthan post-remedy. In the restructuring of corporation, because the restructuring will bringfundamental alteration to corporation assets, creditor in fact play an important role as shareholder.Creditor has voting power on important issues pertinent to restructuring. During the liquidation,the corporation is not allowed to announce nullification without liquidation. This is the last solidprotection provided by corporation law. All these regulations clearly show that creditor's rights isof supremacy over equity protection. Credit should be ensured prior equity. It is indeed afundamental principle which is proved with no doubt.