Viewpoint... Analysis of the nature of the difference make-up commitment and the application of law.

Published:

2022-10-12

Definition of the concept of 1. gap-making commitments. Deficiency, also known as deficiency compensation, deficiency payment, etc., refers to the act of fulfilling the obligation to make up the deficiency in accordance with the agreement when the obligor fails to perform its obligations in accordance with the agreement or fails to achieve a certain profit-making performance goal in order to ensure the realization of the interests of the right holder in the relationship between the principal rights and obligations. It is often represented in the asset management products as a special arrangement in which the underlying assets are not sufficient to pay the current overdue income or principal due on the corresponding payment date in accordance with the agreement of the transaction documents, and the difference undertaker assumes the obligation to make up the difference. This commitment is commonly used in a large number of tiered financial products to reduce investment risk for senior investors. Depending on the object of the replenishment, the difference can be divided into the difference of the expected return, the difference of the debt service debt, the difference of the investment dividend, the difference of the collection of funds, etc. The difference between the differential replenishment commitment and the rigid payment is that the differential replenishment on the equity investment side is essentially the same as the common gambling agreement or gambling clause in the field of private equity investment, which is the redistribution of equity investment risk based on the autonomy of the parties to the transaction. On the investment side, the legal status of the asset management product is the investor. If the counterparty or its affiliates or other third parties voluntarily provide credit enhancement measures for the equity investment transaction, if the subject of the credit enhancement obligated party is qualified and there is no invalid contract, it does not constitute rigid payment, because the credit enhancement obligated party is not the issuer or manager, even if there are economic consequences of "capital preservation and income protection" for the product end investor, it is also not derived from the promise or payment of the issuer or manager, and does not pose a more serious financial risk. The dispute 2. judicial practice on the determination of the commitment to make up the difference. Article 91 of the Minutes of the National Court's Civil and Commercial Trial Work Conference stipulates: "If the parties outside the trust contract provide similar commitment documents such as third-party balance compensation, performance of due repurchase obligations, liquidity support, etc. as credit enhancement measures, and their contents conform to the provisions of the law on guarantee, the people's court shall determine that a guarantee contractual relationship has been established between the parties. If its content does not conform to the provisions of the law on guarantee, the corresponding rights and obligations shall be determined according to the specific contents of the commitment document, and the corresponding civil liability shall be determined according to the facts of the case." The article points out the idea in terms of the qualitative nature of the validity of the contract, but there is no doubt that the content of the credit enhancement measures "conforms" or "does not conform" to the standard of the law on guarantee. In the latter sentence, where "the content does not comply with the provisions of the law on warranties", it is also not clear whether the provisions of the Company Law on external guarantees of companies are permitted. According to article 36 of the "Judicial Interpretation of the Security System", the legal nature of the deficiency shall be interpreted according to its content, which may be interpreted as a guarantee, a debt accession or an independent contract, depending on the circumstances. However, the law does not provide for the criteria for judging different situations, which also makes judicial practice have different judgments on the nature of the commitment to make up the difference. 1. Recognized as a guarantee According to article 681 of the Civil Code, the conditions that constitute a guarantee include: the existence of a principal creditor's debt relationship. Accordingly, if there is an obvious principal-subordinate contractual relationship in the transaction model, and the performance of the differential replenishment obligation is premised on the debtor's failure to perform the debt due, it is more likely that the differential replenishment agreement is considered to be a guarantee contract. For example, (2019) in the case of Supreme Law Minzhong No. 560, Huarong Company signed a Trust Loan Contract with Kaidi Company, and the debtor of Kaidi Company borrowed 0.5 billion yuan from Huarong Company. Huarong Company and Kaidi Ecological Company signed a Letter of Commitment to Make up the Difference, agreeing that if Kaidi Company fails to repay the main contract debt in full and on time, fails to pay any money under the main contract, or has any breach of contract under the main contract, Huarong Company has the right to directly require Kaidi Ecological Company to perform the obligation to make up the difference without any pre-procedure. The court held that the Trust Loan Contract was the principal claim contract, and the Letter of Commitment to Make Up the Difference guaranteed the realization of the principal claim and established a joint and several liability guarantee. "From the definition of the meaning of the difference between the two parties, the" Difference Make-up Contract "stipulates that the main contract is the" Trust Loan Contract ", the principal debtor is Kaidi Company, and the scope of liability for the difference make-up is all the debts under the main contract, all of which are in line with the legal characteristics of the subordination of the guarantee contract. It follows that the nature of the contract is consistent with the legal characteristics of the contract of guarantee, both in terms of the literal interpretation of the core terms of the Contract for Deficiency and in terms of the interpretation of the contract system." 2. Recognized as debt accession According to article 552 of the Civil Code and the general theory, debt accession, also known as "concurrent debt assumption", means that a third party joins the existing debt relationship as a new debtor and assumes joint and several debts with the original debtor to the extent that it is willing to assume. The commonality between debt joining and guarantee is that there must be an existing creditor's and debt relationship as a prerequisite; the difference is that the debt joining establishes a new creditor's and debt relationship, which is independent of the original creditor's and debt relationship, and the guarantee has obvious subordination. It can be seen that, compared with the guarantor, the liability of the debt joining party is heavier, and the requirements for the establishment of debt joining are also higher, because it needs to make a comprehensive agreement on the relationship between creditor's rights and debts. (2019) In the case of Supreme Court Minzong No. 1438, China CITIC Bank and Letv Holding Company signed the "Merger and Acquisition Loan Contract". Letv Company issued a letter to China CITIC Bank stating that in case of overdue or default on the principal and interest of the loan, Letv promised to bear the responsibility of making up the difference in the repayment obligations of the borrower Letv Holding under the "Merger and Acquisition Loan Contract. In the first instance, the Beijing High Court held that the M & A Loan Contract agreed on the guarantee method and the specific name of the guarantee contract, but did not include the letter promising to make up the liability for the difference, indicating that the parties did not recognize the commitment as a guarantee when signing the M & A Loan Contract and a series of guarantee contracts. Secondly, LeTV promises to bear the responsibility for making up the difference as long as there is overdue or default on the principal and interest of the loan. The above promise does not mean to guarantee, on the contrary, it means to actively join the debt. Third, since the guarantee is a typical form of guarantee, its establishment, entry into force, guarantee period, mode of performance, etc. have more stringent provisions. In the absence of a very clear and clear agreement between the parties, it should not be easily identified as a guarantee. Therefore, LeTV's commitment to assume the responsibility of making up the difference belongs to the meaning of debt joining. In the second instance, the Supreme Court upheld the determination. 3. Identified as an independent contract or unilateral burden. In the structure of financial transactions, if there is no principal creditor's rights and debts, or the obligation to make up the difference is not based on a certain creditor's rights and debts, at this time, the balance does not constitute a guarantee or debt accession, but an independent contract or unilateral burden, and the obligation to make up the difference shall perform the corresponding obligations according to the agreement or commitment letter. For example, (2019) in the case of Supreme Law No. 1524, Ankang Company, as a principal, signed a "trust contract" with the trust company, and the trust funds were earmarked for the issuance of trust loans to Renjian Company. Guo, as the actual controller of Renjian Company, signed the "Difference Compensation and Assignment Agreement" with Ankang Company. The agreement stipulates that Ankang Company shall, on each trust benefit distribution day under the Trust Contract, if due to any reason including but not limited to Renjian Company's failure to pay off the principal and interest under the Trust Loan Contract in time and in full, if Ankang Company fails to obtain the distribution of trust benefits on time and in full according to the annualized 13% trust rate of return, Guo shall bear the full supplementary responsibility for the difference. The court held that the agreement agreed that Guo made up Ankang Company's annualized 13% of the trust income, paid the principal of the trust loan and the trust beneficiary right of the transferee Ankang Company, rather than assuming the guarantee liability for the debts incurred by Renjian Company under the contract involved in the case, so it was not recognized as a guarantee guarantee. The nature analysis and legal application of the commitment to make up the difference in 3.. Perhaps noting the particularity of the commitment to make up the difference, some argue that, based on the principle of autonomy of the will of the civil law, the balance of the difference, as an expression of the obligor's willingness to bear the debt, is the result of the autonomy of the parties, and can be recognized as an independent contractual obligation in cases where there is no prior debt that does not conform to the legal characteristics of the guarantee or the debt is added. In view of the fact that the deficiency make-up commitment is in several respects identical to, at least similar to, the guarantee designed in the Civil Code, the advantages of the classification of the deficiency make-up commitment as an atypical guarantee are even more advantageous: the provision of the law on guarantees shall not be applied to the deficiency make-up commitment in cases where the intention of the parties clearly shows that the deficiency make-up commitment and the guarantee differ in terms of constituent elements and legal effect; where the parties' intention is not easy to identify the difference between the commitment to make up the difference and the guarantee, the corresponding provisions of the Civil Code on the guarantee apply by analogy. In this way, cases of deficiency replenishment commitments can be resolved in a more comprehensive and appropriate manner. As far as the application of the specific law for the shortfall is concerned, the following aspects are noteworthy: First, the subordinate nature of the guarantee should not apply to the commitment to make up the difference. The scope of liability for the shortfall may be greater than the secured principal obligation, which is different from the scope of liability for a guarantee, and may itself establish a breach of contract clause. The principle of civil law holds that the secured obligation, since it has a subordinate nature, shall not be heavier than the principal obligation. However, in terms of the transaction structure and purpose of the credit enhancement measure, most parties treat it as an independent obligation, and it is common to set up a default clause. At present, if the people's court supports the plaintiff's claim of making up the difference in the judicial decision, it will usually support the liability for breach of contract. By extension, based on the principle of autonomy, it is entirely possible that the debt content of the credit enhancement measure may be agreed to exceed the scope of the secured debt. However, if the debtor and the creditor subsequently negotiate to change the principal debt and increase the debt, the court may apply the provisions of article 695 of the Civil Code by analogy, and the credit-enhancing party shall not be liable for the increased debt. Secondly, under article 686 of the Civil Code, guarantees are divided into general guarantees and joint and several guarantees, and are presumed to be general guarantees in the absence of an agreement or when the agreement is unclear. The legislative rationale for the presumption of general guarantees in the Civil Code is primarily to mitigate the liability of the guarantor and to avoid the presumption of joint and several liability leading to the bankruptcy of a number of enterprises in "serial debt", which would affect socio-economic development. However, most of the shortfall is used in commercial situations, and there is a reasonable expectation and prior agreement of the parties to initiate credit enhancement measures if the creditor is not fully satisfied. Even if the people's court handles the case of making up the difference according to the idea of guarantee, it should generally find that the credit-adding party bears joint and several guarantee liability. Finally, when the company is the commitment party to the deficiency make-up clause, it shall be bound by the provisions of article 16 of the Company Law and articles 7 to 11 of the Judicial Interpretation of the Guarantee System on the company's external guarantee. Although there is a difference between the commitment to make up the difference and the guarantee, as a kind of nameless contract with the function of guarantee, its content is to increase the credit party to bear an irrevocable debt without compensation, in the economic substance affecting the company's stakeholders, so the company's external guarantee rules should be applied by analogy. Moreover, the parties' use of the margin replenishment commitment is more based on the consideration of facilitating the realization of the rights of the right holder, the burden of the commitment party is heavy, and the lack of the guarantor's defense, more should emphasize the company's decision-making control of the margin replenishment commitment.

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