Creditors Protection Against Corporate Shareholders in USA, UK and India

Abstract

Shareholders play an important role in raising capital for organizations and companies typically provide all the necessary proofs to shareholders to show that they are investing at a right place. The fair and reliable audit figures from income statement and balance sheet are used as evidence of overall performance for the benefit of shareholders. The traditional vulnerability of creditors can be traced to an entity theory of the corporation, coupled with limited liability. Creditor vulnerability is exacerbated by the existence of the corporate group, which has been described as achieving "limited liability within limited liability." Nonetheless, modern corporate law has retreated in a number of significant ways from its former "self-help" attitude to creditors, by shifting risk away from creditors to other parties, such as directors. Although directors and officers of a company are bound by fiduciary duties to act in the best interest of the shareholders, the shareholders themselves normally do not have such duties towards each other. However, in a few unusual cases, some courts have been willing to imply such a duty between shareholders. For example, in California, majority shareholders of closely held corporations have a duty not to destroy the value of the shares held by minority shareholders.

The issue in the recent high-profile corporate governance failures in developed countries has always been central to finance and economics. The recent established exploration elucidates that financial development is largely dependent on investor protection in a country - de jure and de facto. Equally the adequacy of creditor protection is an on-going issue in corporate law. The governance issue in the US or the UK is essentially that of disciplining the management who have ceased to be effectively accountable to the owners. The problem in the Indian corporate sector (be it the public sector, the multinationals or the Indian private sector) is that of disciplining the dominant shareholder and protecting the minority shareholders. Clearly, the problem of corporate governance abuses by the dominant shareholder can be solved only by forces outside the company itself.

The paper analyses the issues that whether the law can actually protect the creditors as under the companies act and how far is it effective‘ whether the impact of cross guarantees in corporate groups, and the inherent tension between entity and enterprise principles in their operation as a liability shifting device is also been taken into account. Whether the directors and shareholders have the duties to protect the interests of the creditors and what security is given to them at times of insolvency of company n winding up of company. The paper discusses the role of the regulator and the capital market and argues however that the corporate governance problems in India are very different than in USA and UK.

Keywords: Shareholders, creditors, investor protection, limited liability, risk