5.4 The Legal Capital Regime Under EU Company Law 155ies, managers, or shareholders. Members of the firm’s corporate bodies may
choose to default on a debt agreement without becoming personally liable to any
party, if they believe it is in the interests of the firm to do so.
Interests of creditors. Creditors can benefit to the extent that the legal capital
regime reduces the risk of a deteroriation of the company’s creditworthiness or the
risk of the company becoming insolvent. However, the legal capital regime does
not prevent the company from making bad business choices. Creditors benefit
only indirectly from the staggered legal constraints on the distribution and use of
assets. In addition to the disclosure of financial information, the most important
provisions that protect creditors in the Member States of the EU include provi-
sions of national company and insolvency laws that make a company’s organ
members personally liable to creditors for damage caused by breach of duty and
make parties who obtained funds from the company liable to return those funds to
the company or its creditors. Where such obligations require breach of provisions
of company law or breach of duty of care, the existence of such statutory stag-
gered constraints can make it easier for creditors to sue.^113
Critical views on the European legal capital regime. Neither fixed legal capital
nor a general legal capital regime are traditional ingredients of the company laws
of common law countries. Fixed legal capital had to be incorporated into English
law for public limited-liability companies by virtue of the Second Directive.
Against this background, it becomes more understandable why critics believe
that adopting an insolvency rule based on the US Revised Model Business Corpo-
ration Act would be a flexible way to protect creditors and why the European legal
capital regime has been heavily critisised particularly in common law countries.
It is nevertheless worth noting that the critics of the European legal capital re-
gime regard it as a failed creditor protector regime but fail to recognise its impor-
tant role in corporate governance. Furthermore, the critics do not compare compa-
rable things, that is, things that serve the same function. As regards the protection
of creditors in the US, the equity-insolvency test is complemented by increased li-
ability under insolvency laws and should not be studied separately. The equity-
insolvency test clearly does not address the issue of allocation of power in the
company at all and is therefore not comparable with the regulation of a company’s
internal decision-making in Europe. The list of the failings of legal capital as a
creditor protection device is nevertheless very long.^114 The critics’ main arguments
are as follows:
- Inflexibility and cost. It has been argued that a legal capital regime makes the
financial structures of companies inflexible, burdens them with cumbersome
(^113) For the liability of directors as a creditor protection mechanism, see Mülbert PO, A Syn-
thetic View of Different Concepts of Creditor Protection - Or a High-Level Framework
for Corporate Creditor Protection (February 2006). ECGI - Law Working Paper No.
60/2006.
(^114) See, for example, Ferran E, Principles of Corporate Finance Law. OUP, Oxford (2008)
pp 181–182.