The UK capital maintenance rules for the protection of the creditorsWord文档格式.docx

1、The definition of the capital maintenance should be divided into two parts. In the Oxford dictionary, the word maintain is defined as the meaning of keeping up or holding the issue. And furthermore, the word “capital” means the net assets of the company. According to this definition, the capital mai

2、ntenance requires that the shareholders of the company should keep the value of the net assets within the undertaking. This principle can be traced to the case of Flitcroft, the judge of the case had clearly pointed out that the creditor needs the protection for the extra risk from the mechanism of

3、limited liability of shareholders.A. The concept of asset diversionWhen shareholders can intervene in operation of the company, they obtain the chance to shift the potential risk of the project from themselves to the creditors. The reason why asset diversion always happened is that shareholders of t

4、he company with dept are incentive to reduce the risk of their capital though various methods. For instance, salaries and dividend always were regarded as a tool by shareholders of the company to be used for the asset diversion. All the methods which was used to contribute to asset diversion would h

5、elp them to reduce the equity cushion; however, it is based on the dependence of creditors while they provide capital to the target company.Then the shareholders of the company attempt to claim dilution by issuing another debt with the establishment of the same or higher priority; therefore, the rig

6、ht of the original creditor was weakened by the new debt if the company face to the situation of insolvency. According to it, the action would improve the level of the leverage and it creates profits at the cost of interest of the creditors. Finally, shareholders might obtain the present value of th

7、e abandoning project which comes from the creditors.In conclusion, the concept of asset diversion explains how shareholders transfer wealth from damaging the profits of the creditors through the different ways. This lead to demand protection for the creditors to decrease the factors mitigating oppor

8、tunistic behavior of the shareholders.B. The function of legal mechanism for protecting creditorsWith the development of the concept of asset diversion, it is obvious that the interests from the different parties in one company would lead to the conflicts, especially for the interest relationship be

9、tween the shareholders and the creditors. It could be the primary problem in the operation of the company, while other conflicts are also existing in the market. According to this, the regulations for the market mainly aimed at the solving the problems between the creditors and the shareholders to p

10、rotect the interest of both parties. Consequently, the protection for the creditors has been taken as a significant issue in the regulations. In other words, the rules comparatively support the right of creditors when the conflicts were caused by the parties of shareholders and creditors. The shareh

11、olders of the company can participate in management, which would be assumed as the directors. It means that the investors are responsible for themselves to profit from the operation of the capital which partly came from the creditors. In detail, they could intervene the investment plan; however, it

12、might be the negative aspects for the creditors. For instance, the risky program could cause the shifting of risk from investors to creditors and the project might be gave up when it only benefits to the creditors. In addition, they also might be in crisis of higher priority of debt issued by the ma

13、nagers of the company. As a consequence, since those creditors who do not have the right to engage the management of the company, provisions should provide an safety environment for the creditors in the market.The strength of the creditors protection will influence the level of risk borne they take.

14、 The provisions are trying to provide a minimum financial condition to meet the need of the parties in the market. In other words, the creditors are affected by the financial condition. Once the level of minimum financial conditions has been decreased, the creditors might renewedly evaluate the risk

15、 of the loan. However, they cannot increase the value of the specific loan in the transaction so that their right should be guaranteed by the regulations.C. The purpose of studying the creditor protectionThe regulations on governing capital market have been discussed both in Europe and UK in order t

16、o regulate the conflicts between both parties including shareholders and creditors. The art of this content in the UK regulation appeals to varieties constraining the behavior of the shareholders so that the efficiency of legal capital provisions should be a questionable issue. In this article, the

17、whole text would be divided into four parts. Firstly, the background and basic information will be shown at the beginning. Secondly, the two legal system concerning creditor protection in the capital market in both UK and Europe would be discussed. Thirdly, compared with two legal mechanisms on this

18、 issue and try to analyze the effectiveness of the UK legal protection for the creditors. And in the final part, the evaluation and suggestion would be provided in the article.2. The UK capital market protection for creditorsA. The legal protection for the creditorsAs previous said, the Company Law

19、of the UK attempted to protect the right of creditors from the infringement of shareholders of the companies. For this reason, the claims of the creditors are embedded in the provisions. The core content of legal mechanism concerning protection for creditors in capital market is that the concept of

20、equity cushion was created to refrain creditors from the insolvency of the company and at the same time, it prevent rest value of the company which should not belong to the shareholders flow to them.However, there are no necessary conflicts between the shareholders and the creditors. When a company

21、is in the dilemma of insolvency, profits of the creditors could not separate from the profits of the shareholders. In general circumstances, the point is advanced to the shareholders, which is almost equal to the positive point to the creditors. Nevertheless, when the company become a bankrupt, the

22、interest of creditors should be taken into the consideration of directors in the board. For the potential danger of the claim dilution happened during the insolvency, it encourage the creditors to use the negative pledge clause that they have made in the contract to guarantee their right during the

23、insolvency of a company. The authority recently regards the issue of priority during insolvency as a serious problem. Additionally, some detail and suggestion concerning on this issue have been raised, but in practice, there was less interesting of this area. In UK capital regulations, the law gives

24、 the protection for the integrity of the system of limited liability of shareholders without numerous exemptions. In some points of views, the shareholders take limited liability so that partial risk of the investment would be converted into the burden of creditors. In addition, there is a rare case

25、 which could be regarded as an exception under the control of the UK legal mechanism. B. The recent reform in the protection of the creditorsTable 1:Source: M Siems and S Deakin Comparative law and finance: Past, present, and future research 166 Journal of Institutional and Theoretical Economics JIT

26、E 1 120-140UK is always considered as providing maximal protection to the creditors among the other countries （as it shows in Table 1）. Since the Companies Act 1985 had been taken into practice, the authority found some improprieties in the implementation of the Act. In details, the provisions were

27、generally considered as unduly complex. And whether the Companies Act 1985 was suitable to the current economy of the country was issued by the public.A common idea suggested that the share capital regulations should provide the corporate creditors from relatively mighty shareholders who only have l

28、imited liability during the operation of the company. This opinion was served as an explanation for large-scale companies as well as provisions of insolvency. Under the environment of national economy, the economic analysis provides that different questions, like the method to protect creditors or t

29、he certain type creditors who are needed the legal protection, should be solved in the legal mechanism. Such debts had been increasingly raised among the UK company law; furthermore, the academic discussion becomes enthusiastic in this area. After that, the document called Strategic Framework which

30、is conducted by the Company Law Review Steering Group pointed out that the problem of effectiveness and competitiveness would show in the reform of the UK Company Law. Under this idea, then the new Companies Act 2006 replaced the Companies Act 1985. There is not only two documents ruled the capital

31、market. After the Companies Act 1985 had been publicized, there are a series of document was announced to the public. For example, there is a number of White Paper and report to regulate capital maintenance. The concept of creditor protection was introduced by the Second Directive; however, it does not work successfully for protecting the interest of a creditor in practice. To some degree, the function of this Second Directive e