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Comparative Study of Capital Systems and Protection of Creditors

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Title: Comparative Study of Capital Systems and Protection of Creditors
Author(s): Czókolyová, Barbora
Contributor: University of Helsinki, Faculty of Law
Discipline: Commercial law
Language: English
Acceptance year: 2015
The thesis is a comparative study of capital systems and protection of creditors. This comparative study was conducted on legal systems of two Member States of the European Union – the Slovak Republic and Finland. Difference between the capital system of these two countries is so extensive, that it makes a perfect ground for comparative problem oriented study of creditor protection. My goal was not to analyse the capital doctrine under the Capital Directive as (i) the minimum legal capital rules are negligible if we are taking into consideration substantial companies, (ii) if the company falls into insolvency the minimum legal capital will definitely not fulfil the claims of creditors and (iii) this legal capital is not locked on a separate bank account as it is possible to use it for the business after incorporation of the company. Thus, my analysis was focusing on the structure of capital systems of these two countries – the Slovak Republic having the traditional capital system with nominal value of shares and Finland, which introduced a capital system with shares without nominal value in 2006. Finnish reform of company law in 2006 circumvented the traditional capital system with shares with nominal value, as the legislator used the concept of accountable par under Article 8 of the Capital Directive in a unique way. This reform restructured the concept of capital system in Europe with a direct impact on the level of creditor protection. Hypothesis of the study was formulated as following: Capital system with shares without nominal value that allows flexible allocation of equity and distribution, and efficiently maintains the solvency of the company is the key element of the creditor protection as it mitigates the conflict of interests between shareholders (by allocating the equity flexibly) and creditors (by keeping the company solvent). These are the following research questions, which were discussed in the thesis: (i) Why do creditors need to be protected?, (ii) How can creditors be harmed by shareholders?, (iii) What kind of protection is provided to creditors through different capital systems?, (iv) Is there any correlation between capital systems and level of creditor protection? Thesis consists of eight chapters. Chapter 1 is an introduction to the thesis, which stipulates the topic and the research questions of the thesis. Moreover, this chapter deals with the scope of the thesis, theoretical framework, methodology of the thesis and importance of the research. Chapter 2 of the thesis elaborates the research question “Why should corporate law deal with creditor protection?” This chapter elaborates the specificities of the agency problem between creditors and shareholders. Moreover, this chapter analyses the reduction of agency problems via covenants and especially imperfections and drawbacks of covenants. Chapter 3 of the thesis deals with the capital systems in the European Union under the Capital Directive. This chapter elaborates the issue of capital system on these two main notions: price of shares and equity. These notions are analysed under the light of concepts of restricted and unrestricted equity in both of the capital systems – capital system with nominal value of shares and capital systems with shares without nominal value. Chapter 4 of the thesis deals with the regulation of the legal capital, especially formation of legal capital and minimum amount of capital. This chapter serves as a quick excursus into the main concepts of legal capital doctrine under the Capital Directive. Chapter 5 of the thesis analyses the distribution of assets from the company. It focuses mainly on the mechanisms of distribution of restricted and unrestricted equity under the both capital systems. Moreover, this chapter deals with a disguised distribution of assets, which is harmful for creditor. Chapter 6 examines the rules regulating the maintenance of the capital, especially the balance sheet test and solvency test. Additionally, rules on specific protection of creditors, when restricted equity is distributed, are examined as well as actions in a serious loss of capital. Chapter 7 elaborates the unlawful distribution of assets and its consequences. This chapter focuses on the liability issues in connection with unlawful distribution of assets from the company. Liability concepts are crucial for well functioning creditor protection within the capital system. Chapter 8 stipulates conclusions of the conducted research. First of all, the main outcome of my research is that the unique application of the accountable par concept under the FLLCA offers a flexible allocation of equity. Secondly, distribution of assets from the company is connected under the FLLCA with solvency test. This test secures the basic interest of creditors – keeping the company solvent. Moreover, this test is directly linked to strong liability consequences, which makes it an effective tool. Thirdly, due to flexible allocation of equity (which favours the shareholders) and keeping the company solvent (which favours the creditors) agency problem between shareholders and creditors is effectively mitigated.

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