The Taiwan High Court issued the 108-Zai-9 Decision of May 14, 2019 (hereinafter, the “Decision”), holding that in case a company endorses a negotiable instrument with an intent to provide an implied guarantee, if the holder of the negotiable instrument is obviously aware of this, even though the company should be liable based on the literal meaning of the negotiable instrument and cannot be released from its liability as the endorser, still the validity of the causal relationship behind the endorsement should be further explored.
According to the facts underlying this Decision, a construction project owned by the debtor or Company D was auctioned under the compulsory enforcement by the Shilin District Court of Taiwan to satisfy a claim concerning a negotiable instrument (hereinafter, the “Enforcement Incident at Issue”). The retrial plaintiffs A and B and Individual C, who was not a party to this lawsuit, applied to the Taipei District Court of Taiwan to grant the compulsory enforcement of promissory notes based on the promissory notes issued by Company D in their possession. The retrial defendant held that the above promissory notes were all issued fraudulently in April or May of 2013 since Company D had gone bankrupt in November 2011. Pursuant to the 48-Tai-Shang-101, 49-Tai-Shang-334 and 64-Tai-Shang-1540 Decisions of the Supreme Court and to Article 277 of the Code of Civil Procedure, the defendant held that since the retrial plaintiffs had obtained the above promissory notes in bad faith or for incommensurate considerations, the claim involving the participation of retrial plaintiffs A and B in the distribution should be excluded, and that since the promissory notes were fraudulently issued subsequently, the claim represented by the promissory notes did not exist and retrial plaintiffs A and B shall not participate in the distribution in the Enforcement Incident at Issue.
According to the Decision, the 92-Tai-Jian-Shang-24 Decision of the Supreme Court indicated: “Since negotiable instruments are literal instruments, the debtors are not permitted to change or supplement their literal meaning by other methods of substantiation. Therefore, if a signature is affixed to the back of a negotiable instrument or its attached sheet in a manner that meets the requirements for endorsement, the liability of an endorser under the Negotiable Instruments Law shall be assumed. Even though the holder of the negotiable instrument is obviously aware of an endorsement which provides an implied guarantee, the liability of the endorser still cannot be released.” Therefore, even though the holder of a negotiable instrument is obviously aware that the company endorses the negotiable instrument to provide an implied guarantee, the company should still be liable based on the literal meaning of the negotiable instrument and cannot be released from its liability as the endorser. However, whether the causal relationship concerning the endorsement is valid should be separately observed. For a company that intends to provide an implied guarantee and assume a debt by issuing or endorsing a negotiable instrument, although the company cannot be released from its liability as the drawer or endorser, still if the reason why the company serves as the drawer or endorser violates Article 16 of the Company Law or the company’s articles of incorporation, the company has grounds for not assuming the liability for the guarantee or debt, and such defense exists between the company and the subsequent holders of the negotiable instrument. In this connection, the company may raise such defense against the holders, and the holders have no ground to request the company to pay for the negotiable instrument.
Moreover, according to the Decision, Company D issued promissory notes to retrial plaintiffs A and B with an intent to guarantee or assume the debt of Individual C. However, Individual C issued the promissory notes on behalf of Company D to guarantee or assume his debt to the retrial plaintiffs rather than execute Company D’s business or provide a guarantee out of Company D’s business needs. Therefore, the guarantee or debt assumption by Individual C in the name of Company D would not be effective to Company D for its violation of Article 16, Paragraph 1 of the Company Law and Article 14 of the Articles of Incorporation of Company D. In addition, Company D and retrial plaintiffs A and B are direct antecedent and subsequent parties to the promissory notes. Therefore, since Company D may raise the above defense against the retrial plaintiffs, the causal claim for the promissory notes does not exist. Retrial plaintiffs A and B may not participate in the distribution based on the promissory note claim. Therefore, the original final decision was not erroneous in the application of law. The retrial plaintiffs’ assertion that the original final decision violated Article 5 of the Negotiable Instruments Law and the gist of the 92-Tai-Jian-Shang-24 Decision of the Supreme Court is groundless.