The Legal Protection Of Subsidiary Company's Creditor In The Connect Transaction

The connected transaction is an inevitable product of modern company system that develops to a certain extent. It plays an active role in the aspect of raising the enterprise effectiveness of operation, lowering the cost, promoting enterprise competitiveness, decreasing the risk of management and realizing company's overall strategic target to a maximum. However, the connected transaction of the natural unfair tendency, controlling shareholders can use their dominant position to do some harm to company, as the result, the interests of the company's creditors, especially subsidiary creditors, cannot be achieved. Investment and financing environment and the natural economic system are disturbed by this act. The doctrine of capital determination, capital maintenance and unchanging capital of traditional company law are applied to do some good to protect the interests of creditors. However, in the circumstance of the connected transaction, a company becomes a tool serving the interests of another company. Although the company remains in the independent legal form, its decision-making abilities are deprived. Especially its financial decision-making abilities are transferred to the controlling companies, the consequence of this act is that profit is distributed among related enterprises. The act of transferring of assets or profits inevitably weakens payment capacity of subsidiary company, thus endangering creditor's rights. Chinese legislations pay great attention to protect creditor's rights, but protection mechanism and rules of design are unreasonable. The consequences of legislations are not up to the expectations. The goal to protect creditors can't arrive at the expense of the heavy cost and interest of shareholders and company. The misuse of Stockholder's Limited Liability and independent personality do harm to the interest of subsidiary creditors. The value goal of fairness and justice is challenged openly, therefore, it's necessary to re-examine and re-adjust relevant basic systems of the traditional company law, and to set up protection measures for subsidiary company's creditors.All in all, this paper combines theory and judicial practice of common law and civil law. It makes brief introduction to perfecting protection system of subsidiary company's creditors, and it tries to find some effective recommendations. This paper is divided into four parts.The first part is to make brief introduction to the intension of the connected transaction and subsidiary company's creditors. This section includes: Firstly, the author define the connected transactions, which includes the definition of related parties and the connected transaction. As the aspect of the legislative of each country, there is no a generally accepted concept of connected person yet. Different countries and regions have different opinions and understandings on the connected person. The methods include two types: the enumerative method and general method. Chinese current law is combination of both of ways. Chinese current Company Law, securities law, and tax law don't make regulations on the definition of the connected transaction clear. Some scholars take example of foreign and domestic relevant provisions, which makes the definition of the connected transaction stated in the company law:"Any legal acts of transferring resources or any obligations between the company and its associated."Most scholars'opinions on the connected transactions are the same. Secondly, the author define the scope of subsidiary company's creditors. The standards scope of connected person like this: One of the parties has power to control the other party management decisions. If the controllers are companies, the controllers can be called controlling company. The controlled company can be called subsidiary company. Controlling company can make decisions on subsidiary company's management and decision-making, so as to maximize their own or the whole group of companies interests. Considering the interests of the subsidiary company, which affects the interests of subsidiary creditors.In the second part is to expound the necessity that the creditor's interests of subsidiary company should be protected in the connected transaction. Controlling company can use many kinds of ways to invade subsidiary company's creditors, but those ways essentially weaken ability of paying back of subsidiary company. Creditors cannot guarantee the right. Therefore, the first section of this part lists several ways in which the rights of creditors are invaded. Then pointing out the shortcomings of traditional company law theory: the independent legal person and limited liability of shareholders. The independent legal person and limited liability of shareholders play an important role in the modern company system, but it seems to have inherent shortage on the aspects of protect creditors. Throughout lists some of the unfair reality of the connected transaction and shortcomings in the aspect of legal theory. We will know the value of defining the connected transaction to protect of creditors. The connect transaction is inevitable in principle, so we cannot adopt attitude of prohibition. The connected transaction have a positive effect, and the law in principle should allow this system to exist. Objectively speaking, the connect transaction really can cause some drawbacks. This is not the fault of itself. The law should allow this system to exist, and should take positive measures to regulate it.The third part is to discuss how to define the connect transactions in other countries. The connected transaction is difficult to all the legislators. The relationships between the affiliated enterprise are very complex, and the connect transactions is so conceal that cannot be easily noticed. Company law of United Kingdom defines this system as voting system of shareholders. Company law of U.S.A through three legal principles to protect the interests of creditors. The principles are: the principle of piercing the corporate veil, Deep Rock Doctrine and substantive consolidation. German Stock Corporation and act defines two types of affiliated enterprises. One is contract-based enterprises, the other is a fact-based enterprises. From this we know that Germany adopts two ways to protect the interests of subsidiary company. Finally, the author introduce the protection method of Taiwan region of China. Up to now, the relevant laws and regulations in Taiwan are not perfect. It already includes basic legal measures of civil law.Comparing the definitions of the connected transaction between different countries and regions, we can see the reference between different laws is deepened. Because of different legal traditions of each country, the differences among them will exist.The fourth part is to introduce how to improve the measures to protect subsidiary company creditors. Chinese current laws have some regulations on this aspect, but many problems exist and many aspects should be improved. First of all, the principle of legislation should be set up in order to make guide action on how to define this problem. Second, a number of specific measures should be cleared. This paper gives several suggestions, such as improving information disclosure system, adopt Deep Rock Doctrine, strengthen the liability of director. Hoping to perfect our country protection system of creditor's interests.