The Supreme People’s Court formulated on December 25, 2020 the Interpretation on the Application of the Guarantee System Application of the Civil Code of the People’s Republic of China the “Interpretation”) for the correct application of the guarantee system provisions of the Civil Code of the People’s Republic of China in combination with civil trial practices. The Interpretation includes sections on General Provisions, Guarantee Contracts, Security Interest, and Atypical Guarantees. This article will cover the key clauses in the General Provisions as follows.
1. Scope of application
The Interpretation specifies its scope of application and the effect of a contract, including disputes arising from mortgages, pledges, liens, guarantees, retention-of-title sales, financial leases, factoring and any other matter involving security functions, are stipulated to fall within the scope of the relevant provisions of this Interpretation.
2. Effect of a guarantee contract
(1). Should the parties stipulate in a guarantee contract that the effect of the guarantee contract is independent of the main contract, or that the guarantor shall assume the guarantee liability if the main contract is held to be invalid, the agreement on the independence of the guarantee shall be deemed as invalid. If the main contract is valid, then the invalidity regarding the independence stipulation of the guarantee contract shall not affect the validity of the guarantee contract; and if the main contract is invalid, the guarantee contract shall also be deemed invalid.
(2). In case of a guarantee provided by a legal person of the state, the guarantee shall be deemed valid if it is used for a loan from any foreign government or international economic organization for on-lending with the approval of the State Council; otherwise, the guarantee provided by a state legal person shall be deemed invalid. Guarantees provided by an urban residents’ committee or a villagers’ committee are invalid unless the villagers’ committee is acting in place of a village collective economic organization in accordance with law, and the guarantee is provided externally pursuant to the discussion and decision-making procedures stipulated under the Villagers’ Committee Organization Law. For guarantees provided by non-profit organizations, if the non-profit is for a public interest purpose such as a school kindergarten, medical institution or elderly care institution, the people’s court shall deem such guarantee contract as invalid. However, if the educational, medical, elderly care facility or any other public interest facility was purchased or rented pursuant to financing, and the seller/lessor retains ownership over those public interest facility as a way to guarantee payment of the price or rent, the security interest established over any real estate, movable property or other property other than the educational, medical, elderly care facility or any other public interest facility shall be deemed as valid.
(3). If the legal representative of a company acts beyond his or her authority in violation of the provisions of the Company Law on the procedure for guarantees made to an external party for entering into a guarantee contract with a counterparty as a representative of the company, the people’s court shall handle in accordance with Articles 61 and 504 of the Civil Code. If the counterparty acts in good faith, the guarantee contract shall be valid against the company; if the counterparty makes a request for the company to assume guarantor liability, the people’s court shall uphold the claim. However, if the counterparty acts in bad faith, the guarantee contract shall be invalid against the company, and the relevant provisions of Article 17 of this Interpretation shall apply as reference if the bad faith counterparty requests the company to assume guarantor liability. In case the legal representative causes the company to incur losses by providing a guarantee beyond his or her authority, the court shall support the company’s claim for the legal representative to provide compensation for such losses. The aforementioned good faith refers to the counterparty being unaware and has no reason to be aware at the time of entering into the guarantee contract that the legal representative was exceeding his or her authority. If the counterparty has evidence to prove that it conducted a reasonable review of the company’s resolution, the people’s court shall conclude that it was acting in good faith, unless the company has evidence that shows the counterparty was aware or should have been aware that the resolution had been forged or altered. If the counterparty enters into the guarantee contract with a listed company based on the information publicly disclosed by the listed company indicating that the guarantee had been approved pursuant to a resolution of the board of directors or the shareholders’ meeting, and the counterparty claims that the guarantee contract is valid against the listed company and the listed company should assume guarantor liability, the people’s court shall uphold the claim.