On July 3, 2019, Liu Guixiang, a deputy ministerial-level full-time member of the Supreme People's Court Adjudication Committee, delivered an important speech at the National Court civil and commercial Trial work Conference, in which Liu Guixiang once again emphasized the importance of unified adjudication standards, and made clear guidance on the adjudication standards for a number of controversial issues such as judicial judgment on the validity of contracts. Among them, the rules of determining the validity of the company's external guarantee contract are particularly concerned.

I. Rules for determining the validity of the company's foreign guarantee contract before the civil and commercial trial work conference

For a long time, the determination of the effectiveness of a company's external guarantee has been a difficult problem in judicial practice. Combined with the view of the book Minutes of the Second Court of Civil Trial of the Supreme People's Court -- Pursuing the Jurisprudence Behind the Judgment recently published by the Supreme People's Court, judicial opinions on the effectiveness of a company's external guarantee contract mainly focus on the following three types:

(A) internal relations theory (external guarantee contract is valid)

This view holds that when the legal representative signs the contract on behalf of the company, the legal consequences shall be borne by the company, and the company guarantee is no exception. From the perspective of transaction habits, usually the creditor does not have the habit of reviewing the internal documents of the guarantee company when signing the guarantee contract, and the signing of the contract only requires the signature or seal of the legal representative of the guarantee company.

The typical case corresponding to this view is the case of Green Energy High-tech Group Co., Ltd. and Sun Sike's enterprise loan dispute [(2016) Supreme Law Minshui No. 301, which was also included in the Supreme People's Court Judicial Views Integration - Civil and Commercial Volume Supplement (2018) edited by Du Wanhua, deputy director of the Advisory Committee of the Supreme People's Court, with strong typicalities]. In its judgment, the Supreme Court held that:

"The Guarantee Contract has the signature of Li Naihua, the legal representative of Henan Green Energy, the predecessor of Henan Green Energy Group, and the official seal of Henan Green Energy, which represents the true intention of Henan Green Energy to the outside world." The resolution procedure of the shareholders' meeting belongs to the internal procedure of the company, and Henan Green Energy provides guarantee for its shareholders without the resolution procedure of the shareholders' meeting, which violates the provisions of Article 16 of the Company Law, but the lack of internal procedure does not affect the effectiveness of the company's external behavior. Therefore, Green Energy Group's claim that the Warranty Contract is invalid cannot be upheld."

(2) Normative nature identification theory (foreign guarantee contract is valid)

This view holds that Article 16 of the Company Law belongs to the management norm to regulate corporate governance, rather than to the effective mandatory provisions. The intention of the legislation of this article is to restrict the behavior of the main body of the company and prevent the actual controller or senior management of the company from harming the interests of the company, minority shareholders or other creditors, and the validity of the guarantee contract cannot be denied on the grounds of violating the provisions of this article.

The typical case corresponding to this view is the dispute over the financial loan contract of Dingbang Industrial Investment Jiangsu Co., Ltd. and Yancheng Tinghu Branch of Bank of Jiangsu Co., LTD. [(2017) Supreme Court Minshen 2032]. In the judgment, the Supreme Court held that:

"The guarantee contract involved in the case is signed by Dingbang Company and the Tinghu branch of the Bank of Jiangsu, the contract is covered with the official seal of Dingbang company, and its legal representative Zheng Zhihua also signed the contract on behalf of the company. The above facts are sufficient to prove that the signing of the guarantee contract for the Hongmingda Company's loan guarantee is the true intention of Dingbang Company...... The Company law does not stipulate that a company cannot provide external guarantee, nor does it stipulate that the company's shareholders' meeting or board of directors must study and decide on providing external guarantee. Even if the articles of association stipulate this, Zheng Zhihua's behavior does violate the provisions of the articles of association, which does not affect the external effect of the behavior, and the validity of the warranty contract involved in the case cannot be denied."

(3) Restriction of representation (foreign guarantee contract is not effective)

That is, Article 16 of the Company Law is not a direct basis for determining the effectiveness of the company's external guarantee, and should be determined by combining the provisions of Article 50 of the Contract Law on representation and applying the rules of Article 48 of the Contract Law by analogy. According to the legal principle that the owner is presumed to know and not know that the law is not exempt from liability, the creditor has the necessary formal review obligation to the relevant board of directors or shareholders (general) meeting resolution when accepting the guarantee, otherwise it does not constitute a bona fide counterpart in the representation, and the guarantee act does not take effect.

The typical case corresponding to this view is the private loan dispute case of Xu Youzan and Yangzhou Slender West Lake Hotel Co., LTD. [(2018) Supreme Court Minshen 4048], in which the Supreme Court held that:

"The original judgment found that the loan subject and the guarantee subject in this case are between related subjects, and there is a factual basis. According to the provisions of Article 16, paragraph 2, of the Company Law of the People's Republic of China, where a company provides a guarantee for a shareholder or actual controller of the company, it must obtain a resolution of the shareholders' meeting or the general meeting of the shareholders. In this case, when Xu Youzan signed the Loan Contract and the Guarantee Contract, he did not ask Xu Ping to provide the shareholders' meeting resolution that Slender West Lake Hotel agreed to guarantee the loan, and failed to fulfill the duty of careful review. The original judgment found that Xu Youzan was not a bona fis, and the guarantee involved in the case was not effective for Slender West Lake Hotel, and the applicable law was not appropriate."

Second, the rules for determining the validity of the company's foreign guarantee contract after the civil and commercial trial work conference

Judging from the above three cases of the Supreme People's Court, and even more cases of the Supreme People's Court in the last three years, the Supreme People's Court did not maintain a relatively consistent caliber when determining the effectiveness of external guarantee contracts, which to a large extent also caused trouble to the judges of lower courts. Therefore, Liu Guixiang special Committee pointed out that "Regarding the effectiveness of contracts where companies provide guarantees for others, the judgment standards are not uniform in practice. It has seriously affected judicial credibility, and it is necessary to unify it."

According to the speech of this civil and commercial trial work conference, the Supreme People's Court has basically formed the view that "the guarantee contract signed by the legal representative without the resolution of the shareholders' meeting or the shareholders' meeting, the board of directors and other company organs is in principle a contract with no right to represent, and if it is not ratified by the company, it should be deemed invalid according to law". Specifically, it is necessary to distinguish between the guaranteed parties:

(1) If the object of guarantee is the shareholder or actual controller of the company, the guarantee contract must be approved by the shareholders' meeting or the shareholders' assembly. Without a resolution of the shareholders' meeting or the shareholders' general assembly, or only a resolution of the board of directors, a guarantee contract signed externally still constitutes an unauthorized representative.

(2) If the object of guarantee is another person, whether the resolution of the shareholders' meeting or the general meeting of shareholders or the resolution of the board of directors shall be stipulated in the articles of association; If there is no provision in the articles of association, a resolution of the board of directors or the shareholders' meeting or the shareholders' general meeting may be adopted; The articles of association provide that the resolution of the shareholders' meeting or the general meeting of shareholders, and the resolution of the board of directors of the company agreeing to provide security constitute powerless representation. However, in view of the provisions of the articles of association against a bona fide counterpart, the bona fide counterpart may claim the validity of the security based on the apparent representation rule. However, this rule is not absolute. If there are any of the following circumstances, even if there is no company resolution, the guarantee shall be deemed to be in line with the true intention of the company and thus the guarantee shall be deemed valid:

(1) The company is a guarantee company whose main business is to provide guarantees for others, or a bank or non-bank financial institution that carries out independent guarantee business;

(2) There is a mutual guarantee and other business cooperation relationship between the company and the main debtor;

(3) The Company provides guarantees to creditors for the conduct of business activities of companies under its direct or indirect control;

(4) The act of providing security for others (excluding shareholders or actual controllers) shall be carried out individually or jointly by shareholders holding more than 50% of the voting rights of the company.

Regarding the review obligation of the relative person, the Supreme Court further clarified: If the actor provides guarantee without the company's resolution, and the counterpart can prove that it has examined the articles of association, resolutions and other documents related to guarantee at the time of concluding the guarantee contract, and the contents recorded in the documents comply with the provisions of Article 16, 104, 121 and other laws of the Company Law, it shall be deemed to constitute a demonstrative representative or demonstrative agent. The company shall bear the corresponding responsibility. If the company makes a defense on the grounds that the relevant resolution is forged or altered by the actor, the procedure for forming the resolution is illegal, the signature is untrue, and the guarantee amount actually exceeds the statutory guarantee limit, the people's court will not support it. However, if there is one of the following circumstances, it indicates that the counterpart has not fulfilled the obligation of examination, and the representation rule is not applicable: The resolution agreeing to the guarantee is made by the company has no authority to decide, the guarantee resolution is not passed by the majority required by law or the articles of association, the shareholders or directors participating in the resolution violate the provisions of Article 16 (3) of the Company Law or Article 124 on avoidance of voting, the personnel participating in the resolution do not comply with the company's articles of association, business license records, etc.

In addition, regarding the legal consequences and remedies for the invalidation of the guarantee contract, the Supreme People's Court has also made a clear explanation: if the actor exceeds his power to provide a guarantee without the company's ratification and does not constitute an apparent representative or apparent agent, and the counterpart claims that the actor should bear the corresponding responsibility, the liability of the actor should be determined according to the provisions of Article 171 of the General Provisions of the Civil Law. If the counterparty, at the time of concluding the guarantee contract, knows that the guarantee act has not been resolved by the Company, or is able to determine that the counterparty and the doer transfer commercial risks to the Company through the guarantee contract, the counterparty may bear the corresponding losses by itself. If the opposite party is unable to provide evidence to prove the actor who concluded the guarantee contract with it, its claim shall be rejected by judgment.

After this civil and commercial trial work conference, it can be predicted that the company will have a higher review obligation when accepting third-party guarantees in the future. For the company's management and risk control legal personnel, it is not only necessary to pay attention to whether the seal and signature of the third party is true, but also to whether the third party has fully implemented the internal approval process, which will also put forward higher requirements for the improvement of the company's internal governance.

Zhu Qin

Chief partner and lawyer of Shanghai Guohillhouse Law Firm

He has many years of legal service experience in the fields of corporate compliance, private equity investment and venture capital, finance and asset securitization, capital markets and mergers and acquisitions, engineering and real estate, dispute resolution, bankruptcy reorganization and liquidation.

Wu Yibo

Assistant lawyer, Shanghai Guohillan Law Firm

Practice areas include capital markets, dispute resolution, etc.