1、Application of “Deep Rock” Doctrine and Its ReferenceAbstract: With the deepening of the economic globalization, corporation plays a more and more important role in the world. Corporation as a great invention owns an independent personality, which brings us booming economy. But once abused intention
2、ally, it will degenerate into an instrument to defraud the creditors or the public. In order to decrease its negative effects and sustain the booming market, “Deep Rock” doctrine as well as the Disregarding of the Corporate Entity, is firstly used in the Anglo-American legal families to regulate the
3、 corporation, although China accepted the institution of disregarding of the corporate entity in the new Company Law of the Peoples Republic of China, “Deep Rock” doctrine is still neither embraced in it or in the newly enacted Law of the Peoples Republic of China on Enterprise Bankruptcy. This arti
4、cle especially presses on the comparison between the tow foresaid doctrines and aims to give the practical method to apply it in China.Key words: “Deep Rock” doctrine; Disregarding of the Corporate Entity1Introduction of “Deep Rock” doctrineCorporation is the product of the mature economy. Once born
5、, this great invention shows its amazing power in the development of market and soon becomes the engine of the economy. All its advantages can be attributed to its two footstonesindependent personality and limited liability, however, every coin has two sides; every business company is organized and
6、carried on primarily for the profits of the shareholders which conflicts the public interest, and its merits also can be perverted as an instrument for approving the evils which impair the interests of the creditors and the public. In the developed countries, especially in the U.S.A., the dilemma pr
7、oved itself more and more obviously. Therefore, the Disregarding of the Corporate Entity was confirmed by a series of judgment, subsequently some important principles and doctrines developed, deep rock doctrine is one of them.“Deep Rock” doctrine is a rule of bankruptcy law in the United States, whi
8、ch is developed by the U.S. Supreme Court in the case of Taylor v. Standard Gas Co., 306 U.S. 307 (1939). The rule requires that, where a subsidiary corporation declares bankruptcy and an insider or controlling shareholder of that subsidiary corporation asserts claims as a creditor against the subsi
9、diary, loans made by the insider to the subsidiary corporation may be deemed to receive the same treatment as shares of stock owned by the insider. Therefore, the insiders claims will be subordinated to the claims of all other creditors, i.e. other creditors will be paid first, and if there is nothi
10、ng left after other creditors are paid then the insider gets nothing. This also applies (and indeed the doctrine was first established) where a parent company asserts such claims against its own subsidiary. The insider or controlling shareholder of the subsidiary corporation usually owns more inform
11、ation and is easier to transfer the capital than the other creditors. The application of “Deep Rock” doctrine changes the unequal condition. Since the establishment of the doctrine, it has been widely used to avoid the abuse of the equitable rights of the creditors when it is added the existence of
12、a “planned and fraudulent scheme”, the doctrine is also called “Equitable Subordination Rule” or “Subordination Rule”.2Application of “Deep Rock” doctrineActually it is a breach of the traditional redress procedure in bankruptcy, and exists as an exception of the law. It can not be perverted in the
13、judgment, otherwise the advantages of the corporate will be drained and the country will lose a booming market. To handle it, find a proper test in the judgment becomes necessary, for the absence of reasonably objective tests in this area has led to considerable confusion and some inconsistency in r
14、esults. The secular world is complex; the texts for subordination under the Deep Rock doctrine differ in degree or kind from the tests applicable to Piercing the Corporate Veil. In its original U.S. Supreme Court case of Taylor v. Standard Gas Co., 306 U.S. 307 (1939), the test is whether the subsid
15、iary was undercapitalized at the time that it was established, and can thereby be shown to have been mismanaged for the parent corporations benefit , while in the case Pepper v. Litton, it changed into whether the “planned and fraudulent scheme” exits or not.3 Comparison between the “Deep Rock” doct
16、rine and the Disregarding of the Corporate EntityAs is said in the foregoing statementindependent personality and limited liability are two footstones of the modern company, but as the CummingBruce LJ said: “The court will use its power to pierce the corporate veil if it is necessary to achieve just
17、ice irrespective of the legal efficacy of the corporate structure under consideration.” His words can be a kind of description of the Disregarding of the Corporate Entity which means in order to achieve justice, the court sometimes will take the corporate as some partners business and call them to p
18、ay off the loans instead of the corporate.Both of the two doctrinesthe “Deep Rock” doctrine and the Disregarding of the Corporate Entityare developed by the U.S. Supreme Court case and then enacted in the statute law. They are used to avoid the abuse of the corporate entity and protect the creditors
19、. The basis of the “Deep Rock” doctrine is internally same with the Disregarding of the Corporate Entity, and the difference only exits in the extent. Both of them starts from four moral obligations which is confirmed on legal level honesty, fairness, legal obligation comes first and no intentional
20、obstruction on the payment for the creditors.However, the two doctrines are independent and their differences are as follows:3.1 Different Ways in ApplicationThe theory of the “Deep Rock” doctrine relies on the Act of Fraudulence Property Diversion which adjusts the relationship between the ordinary
21、 creditor and obligor. It allows the creditor withdraw the diversion the obligor made on his property. Before the invention of the “Deep Rock” doctrine, the court intends to solve the problem by adoption of the Disregarding of the Corporate Entity. It denies the subsidiary corporation as an independ
22、ent entity, so the parent corporation should commit responsibility of its corporation. However, the “Deep Rock” doctrine does not have to disregard the corporate entity. It achieves just between the parties by making the insider inferior to the other creditors.3.2 Different Spheres in ApplicationThe
23、 “Deep Rock” doctrine is mainly used in the bankruptcy procedure while the Disregarding of the Corporate Entity is not only applied in the bankruptcy but also in the torts, tax and contract. The later is much wider then the former.3.3 Different Punitive DegreesThe Disregarding of the Corporate Entit
24、y not only denies the credits the corporate owed the insiders or the parent corporate but forces them to commit joint and several liabilities when the corporate capital is not enough to refund the other credits. On this point, it is a punitive legal doctrine. But only on terms of just does the “Deep
25、 Rock” doctrine apply, and the insider or the parent corporate is subordinated to the other creditors. It merely strips their privilege on the refund. Therefore the “Deep Rock” doctrine is less punitive than the Disregarding of the Corporate Entity.3.4 Different Onus ProbandiWhether the Disregarding
26、 of the Corporate Entity is applied or not is a matter of fact which is left to the jury. The court should take these essences into accountundercapitalization, fraud, commingling of asserts, failure to follow the corporate formalities and the control in order to decide whether the corporate is a ins
27、trument, dummy or the other ego of other people or corporate. The unjust is so terrible that the court has to denies the entitys existence. The plaintiff often should prove that the behavior of the shareholders shows nothing about the corporate as an independent entity but to indicate that it is tot
28、ally an instrument of them.Whereas when it comes to the “Deep Rock” doctrine bases on the ordinary doctrines such as equity and honesty. Technically, the plaintiff just needs to prove that there is cheat and dishonesty on the whole.4 The Reference of the “Deep Rock” doctrine for ChinaGenerally, in t
29、he U.S.A. there are only some fundamental regulations scattering in some state legislation about the Disregarding of the Corporate Entity, such as Tex.BCA, 1997. In practice, the judges especially the Supreme Court judges decide how to apply it. Compared with the U.S.A., we have been somewhat prior
30、to it, for in the new Company Law of the Peoples Republic of China , the Disregarding of the Corporate Entity principle is clearly listed in Article 20 but the “Deep Rock” doctrine is not clearly alleged in the law, neither does the Bankruptcy Law. Since we belong to the civil law legal family, judi
31、cature should follow the legislation, and the judges power can not be expanded as wide as their counterparts in the U.S.A. Although it is unnecessary to totally follow the U.S.A., the doctrine is a practical one, with reference to the foreign legislation, wed better enact rules or something else in
32、the form of the secondary law to guide the exerciser. Meanwhile, it can be taken into consideration to embody it into the procedure of the bankruptcy, and then embrace it into the Bankruptcy Law.In conclusion, the solutions to embrace the “Deep Rock” doctrine into our existing system are as follows:
33、 Firstly, clarify it in a special charter in the Company Law of the Peoples Republic of China, as the basic legal premises for the application of the “Deep Rock” doctrine; secondly, considering the unity of the bankruptcy procedure, the main procedure regulations should be embodied in the Bankruptcy Law, along with the other subordinate law to form a regulation system.
