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The Creditor Concern

Ashima Sehgal

The Corporate has established itself as the strongest business form. And yet, the age-old debate on its
core – limited liability – continues as the global creditor protection laws come under the scanner.

As common knowledge goes, a Company stakeholders that are protected by the law
(or corporate) is “a voluntary association of globally. Although the legal need for the
persons formed for the purpose of doing same can be dispensed by providing
business, having a distinct name and limited contractual security, owing to the
liability”. This is an incredibly singular characteristic “limited liability”, corporate
definition, as the corporate form of creditors face a risk specific to this business
business ownership sees different structures form. Despite this common base, the
in jurisdictions across countries. Business common-thread view is violated when we
has traversed boundaries, and legal categorize the countries into two types of
compatibility across nations should aim to jurisdictions: creditor-friendly and debtor-
facilitate this process of globalisation, friendly. Conventional wisdom suggests that
providing a framework for a worldwide US is debtor-friendly, UK and EU are
unison of commerce. And the uniformity in creditor-friendly, while Japan lies midway
the corporate form, even the underlying between the extremes. These facts are
divergence, is quite encouraging. portrayed by several stances of the law in
these countries. For instance, Germany,
Switzerland and France have a statutory
Notwithstanding the differences, the requirement to initiate bankruptcy
numerous definitions of a business proceedings at its onset. A harsher stand is
corporation given by the statutes worldwide taken by UK, where the directors, having
comprise of five essential elements – legal failed to act timely in the event of
personality, limited liability, transferable insolvency, are liable for damages. In
shares, delegated management under a contrast, neither US nor Japan impose any
board structure, and investor ownership. legal liability on the boards of insolvent
Legal personality and limited liability are companies. The US Bankruptcy Code
the defining characteristics, and give this undertakes a more liberal position, giving
form most of its advantages, including lower the failing board the first chance to devise
cost of capital and creditor protection. revival strategies and reorganisation.

That said, a quick scan of the company law Supplementing this argument, EU and
of different countries shows that corporate Japanese laws require the „larger‟
creditors are the only non-shareholder companies to be audited professionally,
while the closely held business (private enforced to different extents, and in a range
companies) in the USA have limited of combinations, may conclude in similar
obligation of maintaining financial accounts, results. For example, the markets in USA,
which they are not compelled to disclose to because of high level of integration, are able
the public. (On the contrary, despite the to sustain many credit rating organisations.
rather loose regulations for closely held And so, even in the absence of stringent
companies, disclosure by public companies disclosure norms, when the information is
is more emphasised on in the US than in available through the channels of credit
any other jurisdiction. Well, the irony of a rating, it seems implausible that an entity
capitalist economy.) Many more such will extend credit to another without
examples can be cited to exhibit the evaluating its legal capital, investment
variance in the approach towards protection capital and capital maintenance. Hence, the
of corporate creditors – both voluntary and leeway given by some jurisdictions is
involuntary – under different statutes. compensated by other complimentary
factors in play, effecting a regulated,
workable business scenario.
Creditor protection laws in different
countries deviate because of the uneven
levels of importance attached to this The growing integration of product and
concept. And so it is no surprise that the capital markets gives rise to a need to
UK, having the most creditor-friendly bridge the jurisdictional differences in
jurisdiction, has the best record in enforcing creditor protection. Stronger creditor
effective creditor protection, while the protection laws are witnessed in economies
implementation in Japan has been a little with fragmented markets. As exhibited by
slack. But in a globally competitive business the recent global developments, it would be
environment, the focus remains on in the best interest of international as well
convergence of these legal provisions, and as domestic business if the pro-creditor
when taken in a macro context, the jurisdictions toned down a little, initiating
divergence seems less significant. And better market integration, and similarly,
here‟s why. slight stiffening of the debtor-friendly laws,
improving the creditor protection norms in
countries like USA, leading the path to
Different legal strategies, adopted and secular convergence.