Standard Construct For Substantive Consolidation Of Corporate Groups

Corporate group is a kind of organization formality between market and enterprise,which can transform the uncertainty of market risk into internal coordination of corporate group,reduce the transaction cost and market risk,and improve the efficiency of resource allocation.However,since the limited liability of shareholders may enable investors to realize risk isolation through the structural design of the corporate group and investors to obtain multiple protections of the limited liability system,the possibility of abuse of limited liability by individual shareholders or parent companies is greatly increased,which is likely to lead to risk externalization and put creditors in a very disadvantageous situation.In practice,the issue of risk externalization of corporate groups in China is serious.Firstly,corporate groups have serious debt problems and there are extensive internal interconnections and mutual insurance.In addition,the corporate groups make use of associated relationships to finance excessively.Thirdly,the corporate groups transfer funds internally,resulting in inefficient allocation of the internal capital market.Simultaneously,it is difficult to coordinate the conflicts of interest among the external creditors,internal creditors and external creditors of different member companies of the corporate group.The piercing the corporate veil doctrine of the company law cannot solve the bankruptcy problem of highly mixed corporate personality of the company group.For the above problems,China has introduced the substantive consolidation system,but in judicial practice,courts often refer to the rule of disregard of corporate personality to make judgments.By comparing the relief effects of disregard of corporate personality with those of substantive consolidation,this article concludes that positive disregard of corporate personality is a disregard of defensive asset partition(shareholders’ limited liability),while reverse disregard of corporate personality and substantive consolidation rule relieves affirmative asset partition(with priority of liquidation protection attached).Affirmative asset partition gives the company’s unsecured creditors priority over the company’s shareholders.The significance of the substantive consolidation rule is to give creditors relief against dividing their assets when the costs of the affirmative asset partition significantly exceed the benefits thereof,correcting corporate groups for abusive corporate forms.The substantive consolidation system originates from the precedents of the United States and has become an independent system for the bankruptcy law.It also has statutory provisions in Australia and New Zealand,but the legislator of Germany has rejected the application of the substantive consolidation explicitly.There are also different attitudes of theory and practice circles in Japan to the application of substantive consolidation system.Two issues concerning the application of substantive consolidation in China.First,there is no clear basis for adjudication,and the Minutes of the National Court Work Meeting on Bankruptcy Trials is not a source of law,which leads some courts to refer to the rules on disregard of corporate personality or the principles of the Enterprise Bankruptcy Law when adjudicating substantive consolidation cases of groups of companies.Second,the standards for bankruptcy through substantial merger are controversial.The complexity of a corporate group is based on the contradiction between the independent legal personality of each member company and the unified management and control of the corporate group.Therefore,in applying substantive consolidation,the court shall abide by the principle of prudence and regard it as the last resort after exhausting all remedies.The standard of substantive consolidation shall apply to a corporate group with highly mixed corporate personality that is in asset and financial difficulties.The standard of highly mixed corporate personality is the condition precedent for the application of substantive consolidation to a corporate group.Different from the mix of corporate personality in the sense of the Company Law in terms of emphasis and legal consequences,the core criteria for determining the mix of corporate personality in substantive consolidation is disentanglement in asset including the severity of property confusion and excessive separation costs.The protection of creditors’ interests means the benefits to be obtained by the creditors of the corporate group as a whole,the enhancement of the reorganization value,and the greater depletion of existing assets that can be avoided by the substantive consolidation.The application of substantive consolidation is a balance between fairness and unfairness at various levels,and seeks overall substantive justice.