The role of legal capital rules in creditor protection: Contrasting the demands of western market economies with Ukraine's transitional economy.

Abstract

Rules regulating a company's capital (legal capital rules) have traditionally been considered a creditor protection mechanism. More recently, however, commentators have suggested that legal capital rules are an ineffective and unnecessary form of creditor protection in developed economies, since the rules themselves are incapable of delivering the desired protection, and other strategies are available to provide what is necessary. These other strategies include directors' duties (of the creditor-regarding variety) and contractual mechanisms (enabling creditors to protect themselves contractually). In developed economies, the existence of these alternative strategies diminishes the need for a strict legal capital regime. The position might be different in developing economies. Do legal capital rules have a role to play in creditor protection in a transitional economy, where a comparable framework of creditor protection mechanisms is missing or under-developed. In light of the inadequacy of the ex post creditor protection framework in the transitional economy of Ukraine, the protection offered by the legal capital rules (however limited) emerges as a potentially useful collective guarantee against the opportunistic withdrawal of assets by corporate controllers. However, the practical effect of even such basic regimes is often compromised by the corporate environment in which the regime operates. Underdeveloped market mechanisms, non-transparent ownership structures and weak judicial credibility can adversely affect creditor protection. In such an environment, pressure to deliver functional convergence by way of voluntary corporate governance codes, international organisations' initiatives, and training in international judicial standards can be effective in helping to move forward the necessary changes by bearing on the acceptance of best practices and ethics