Viewpoints | New changes in the Civil Code on external guarantees for corporate branches
Published:
2022-02-21
1. Foreword Article 74 of the Civil Code provides that legal persons may establish branches in accordance with the law. If a branch engages in civil activities in its own name, the civil liability arising therefrom shall be borne by the legal person. As an enterprise legal person, the effectiveness of the guarantee provided by its branches to the outside world, the Civil Code does not follow the relevant provisions of the original Guarantee Law, and is briefly analyzed below in conjunction with the Civil Code and related provisions. Legal status of branches of 2. companies As an independent enterprise legal person, its branches are not independent civil subjects, and it shall obtain written authorization from the company to engage in civil activities on behalf of the company. The form of written authorization can be either a general authorization reflected in the business license of a branch of the company or an individual written authorization. The validity of the original guarantee law of the 3. on the external guarantee of the branch of the enterprise legal person shall be judged by the written authorization of the legal person. If a branch of an enterprise legal person concludes a guarantee contract with a creditor without the written authorization of the legal person or beyond the scope of the authorization, the contract is invalid or the part beyond the scope of the authorization is invalid, and if the creditor and the enterprise legal person are at fault, they shall bear the corresponding civil liability according to their fault; if the creditor is not at fault, the enterprise legal person shall bear the civil liability. Therefore, if the debtor, guarantor and creditor are at fault, they shall bear the corresponding civil liability according to their fault. If a branch of an enterprise legal person provides a guarantee with the written authorization of the legal person, if the scope of the written authorization of the legal person is unclear, the branch of the legal person shall bear the guarantee responsibility for all the debts stipulated in the guarantee contract. New Changes in the 4. Civil Code on the External Guarantees of Corporate Branches Comparing Article 11 of the Interpretation of the Supreme People's Court on the Application of the Guarantee System under the the People's Republic of China Civil Code, which came into effect on January 1, 2021, it can be found that there have been significant changes in the determination of the validity of the external guarantee of the company's branches: The (I) shall perform the procedures for the resolution of the shareholders' (general) meeting or the board of directors. Since the branch of the company is not an independent civil subject, its representation comes from the company. In order to prevent the legal representative from providing guarantees for others on behalf of the company at will, causing losses to the company and harming the interests of small and medium shareholders, Article 16 of the Company Law restricts the representation of the legal representative and stipulates that the resolutions of the company's shareholders (general) meeting, board of directors and other company organs must be used as the basis and source of authorization. The company's resolution is the direct evidence to prove the true meaning of the company's external guarantee. The relative can only claim liability from the company or branch in good faith. Branches of (II) financial institutions are not required to perform the company's authorization to issue a letter of guarantee. In view of the principle of separate supervision of the financial industry in China, the Banking and Insurance Regulatory Commission supervises banks, insurance and other non-bank financial institutions, and the Securities and Futures Commission supervises financial institutions in the securities industry, whether financial institutions that can operate letter of guarantee business need to be determined in accordance with the regulatory regulations of various financial institutions. A financial institution does not need to obtain a corporate resolution to issue a letter of guarantee, and may use whether the business license of the financial institution records the letter of guarantee or guarantee business as the basis for determining whether the company authorizes the branch in general. For guarantees other than guarantees, authorization should still be obtained in accordance with the appropriate resolution procedures. The branch of the (III) guarantee company must obtain the authorization of the company. A guarantee company is a company established in accordance with the Regulations on the Supervision and Administration of Financial Guarantee Companies and is not subject to the adjustment of Article 16 of the Company Law. Due to the special nature of the business of the guarantee company, its business license of course records the guarantee business, can not be simply understood as the guarantee company's general authorization of the branch. According to Article 8 of the Judicial Interpretation of the Guarantee System of the Civil Code, a guarantee company does not need to make a resolution by the company to provide a guarantee. Considering the particularity of the guarantee, there is of course guarantee business in the business license of its branch, but it cannot be understood as the general authorization of the company. Therefore, although the external guarantee of the branch of the guarantee company does not need a resolution by the company, it should still obtain the authorization of the company. 5. Reference Law Article 11 of the Interpretation of the Supreme People's Court on the Application of the Guarantee System in the Civil Code of the People's the People's Republic of China of China (Fa Shi [2020] No. 28) If a branch of a company provides a guarantee in its own name without a resolution of the shareholders' (general) meeting or the board of directors of the company, and the relative requests the company or its branch to bear the guarantee liability, the people's court shall not support it, but the relative does not know and should not know that the branch provides external guarantee without the company's resolution procedure. If a branch of a financial institution issues a letter of guarantee within the scope of business recorded in its business license, or is authorized to issue a letter of guarantee by a superior institution with the right to engage in guarantee business, and the financial institution or its branch claims not to bear the guarantee liability on the grounds of violating the provisions of the Company Law on the resolution procedure of the company's external guarantee, the people's court shall not support it. If a branch of a financial institution provides a guarantee other than a letter of guarantee without the authorization of the financial institution, and the financial institution or its branch claims not to be liable for the guarantee, the people's court shall support it, except where the counterpart does not know and should not know that the branch provides a guarantee without the authorization of the financial institution. If a branch of a guarantee company provides a guarantee without the authorization of the guarantee company, and the guarantee company or its branch claims not to bear the guarantee liability, the people's court shall support it, except where the counterpart does not know and should not know that the branch provides a guarantee without the authorization of the guarantee company. If a branch of the company provides a guarantee to the outside world, and the relative is not in good faith and requests the company to bear the liability for compensation, it shall be handled with reference to the relevant provisions of Article 17 of this interpretation. 2. Interpretation of the Supreme People's Court on Several Issues concerning the Application of the the People's Republic of China Guarantee Law (Fa Shi [2000] No. 44) Article 17 If a branch of an enterprise legal person provides a guarantee without the written authorization of the legal person, the guarantee contract shall be null and void. Therefore, if a loss is caused to the creditor, it shall be dealt with in accordance with the provisions of Article 5, paragraph 2, of the Security Law. If a branch of an enterprise legal person provides a guarantee with the written authorization of the legal person, if the scope of the written authorization of the legal person is unclear, the branch of the legal person shall bear the guarantee responsibility for all the debts stipulated in the guarantee contract. If the property operated and managed by a branch of an enterprise legal person is not sufficient to bear the guarantee liability, the enterprise legal person shall bear civil liability. If a branch of an enterprise legal person shall bear the liability for compensation after the guarantee provided by the branch is invalid, it shall be borne by the property managed by the branch. If an enterprise legal person is at fault, it shall be dealt with in accordance with the provisions of Article 29 of the Guarantee Law. 3. Article 16 of the the People's Republic of China Company Law (as amended in 2018) The company's investment in other enterprises or the provision of guarantees for others shall, in accordance with the provisions of the company's articles of association, be resolved by the board of directors or the shareholders' meeting or the general meeting of shareholders; if the company's articles of association stipulate a limit on the total amount of investment or guarantee and the amount of a single investment or guarantee, it shall not exceed the prescribed limit. Where a company provides a guarantee for the shareholders or actual controllers of the company, it must be resolved by the shareholders' meeting or the general meeting of shareholders. The shareholders specified in the preceding paragraph or the shareholders controlled by the actual controller specified in the preceding paragraph shall not participate in the voting on the matters specified in the preceding paragraph. The vote shall be passed by a majority of the voting rights held by other shareholders present at the meeting. 4. Minutes of the National Court Conference on Civil and Commercial Trials (Law [2019] No. 254) 17. [Violation of Article 16 of the Company Law constitutes ultra vires representative] In order to prevent the legal representative from providing guarantees for others on behalf of the company at will, causing losses to the company and harming the interests of small and medium shareholders, Article 16 of the Company Law restricts the representation of the legal representative. According to this article, the act of guarantee is not a matter that can be decided by the legal representative alone, but must be based on the resolution of the company's shareholders (general) meeting, board of directors and other corporate organs as the basis and source of authorization. If the legal representative provides security for others without authorization, it constitutes an ultra vires representative, and the people's court shall, in accordance with the provisions of Article 50 of the Contract Law on the ultra vires representative of the legal representative, distinguish whether the creditor is in good faith at the time of the conclusion of the contract to determine the validity of the contract: if the creditor is in good faith, the contract is valid; otherwise, the contract is invalid.
1. Foreword
Article 74 of the Civil Code provides that legal persons may establish branches in accordance with the law. If a branch engages in civil activities in its own name, the civil liability arising therefrom shall be borne by the legal person. As an enterprise legal person, the effectiveness of the guarantee provided by its branches to the outside world, the Civil Code does not follow the relevant provisions of the original Guarantee Law, and is briefly analyzed below in conjunction with the Civil Code and related provisions.
Legal status of branches of 2. companies
As an independent enterprise legal person, its branches are not independent civil subjects, and it shall obtain written authorization from the company to engage in civil activities on behalf of the company. The form of written authorization can be either a general authorization reflected in the business license of a branch of the company or an individual written authorization.
The validity of the original guarantee law of the 3. on the external guarantee of the branch of the enterprise legal person shall be judged by the written authorization of the legal person.
If a branch of an enterprise legal person concludes a guarantee contract with a creditor without the written authorization of the legal person or beyond the scope of the authorization, the contract is invalid or the part beyond the scope of the authorization is invalid, and if the creditor and the enterprise legal person are at fault, they shall bear the corresponding civil liability according to their fault; if the creditor is not at fault, the enterprise legal person shall bear the civil liability. Therefore, if the debtor, guarantor and creditor are at fault, they shall bear the corresponding civil liability according to their fault. If a branch of an enterprise legal person provides a guarantee with the written authorization of the legal person, if the scope of the written authorization of the legal person is unclear, the branch of the legal person shall bear the guarantee responsibility for all the debts stipulated in the guarantee contract.
New Changes in the 4. Civil Code on the External Guarantees of Corporate Branches
Comparing Article 11 of the Interpretation of the Supreme People's Court on the Application of the Guarantee System under the the People's Republic of China Civil Code, which came into effect on January 1, 2021, it can be found that there have been significant changes in the determination of the validity of the external guarantee of the company's branches:
The (I) shall perform the procedures for the resolution of the shareholders' (general) meeting or the board of directors.
Since the branch of the company is not an independent civil subject, its representation comes from the company. In order to prevent the legal representative from providing guarantees for others on behalf of the company at will, causing losses to the company and harming the interests of small and medium shareholders, Article 16 of the Company Law restricts the representation of the legal representative and stipulates that the resolutions of the company's shareholders (general) meeting, board of directors and other company organs must be used as the basis and source of authorization. The company's resolution is the direct evidence to prove the true meaning of the company's external guarantee. The relative can only claim liability from the company or branch in good faith.
Branches of (II) financial institutions are not required to perform the company's authorization to issue a letter of guarantee.
In view of the principle of separate supervision of the financial industry in China, the Banking and Insurance Regulatory Commission supervises banks, insurance and other non-bank financial institutions, and the Securities and Futures Commission supervises financial institutions in the securities industry, whether financial institutions that can operate letter of guarantee business need to be determined in accordance with the regulatory regulations of various financial institutions. A financial institution does not need to obtain a corporate resolution to issue a letter of guarantee, and may use whether the business license of the financial institution records the letter of guarantee or guarantee business as the basis for determining whether the company authorizes the branch in general. For guarantees other than guarantees, authorization should still be obtained in accordance with the appropriate resolution procedures.
The branch of the (III) guarantee company must obtain the authorization of the company.
A guarantee company is a company established in accordance with the Regulations on the Supervision and Administration of Financial Guarantee Companies and is not subject to the adjustment of Article 16 of the Company Law. Due to the special nature of the business of the guarantee company, its business license of course records the guarantee business, can not be simply understood as the guarantee company's general authorization of the branch. According to Article 8 of the Judicial Interpretation of the Guarantee System of the Civil Code, a guarantee company does not need to make a resolution by the company to provide a guarantee. Considering the particularity of the guarantee, there is of course guarantee business in the business license of its branch, but it cannot be understood as the general authorization of the company. Therefore, although the external guarantee of the branch of the guarantee company does not need a resolution by the company, it should still obtain the authorization of the company.
5. Reference Law
Article 11 of the Interpretation of the Supreme People's Court on the Application of the Guarantee System in the Civil Code of the People's the People's Republic of China of China (Fa Shi [2020] No. 28)
If a branch of a company provides a guarantee in its own name without a resolution of the shareholders' (general) meeting or the board of directors of the company, and the relative requests the company or its branch to bear the guarantee liability, the people's court shall not support it, but the relative does not know and should not know that the branch provides external guarantee without the company's resolution procedure.
If a branch of a financial institution issues a letter of guarantee within the scope of business recorded in its business license, or is authorized to issue a letter of guarantee by a superior institution with the right to engage in guarantee business, and the financial institution or its branch claims not to bear the guarantee liability on the grounds of violating the provisions of the Company Law on the resolution procedure of the company's external guarantee, the people's court shall not support it. If a branch of a financial institution provides a guarantee other than a letter of guarantee without the authorization of the financial institution, and the financial institution or its branch claims not to be liable for the guarantee, the people's court shall support it, except where the counterpart does not know and should not know that the branch provides a guarantee without the authorization of the financial institution.
If a branch of a guarantee company provides a guarantee without the authorization of the guarantee company, and the guarantee company or its branch claims not to bear the guarantee liability, the people's court shall support it, except where the counterpart does not know and should not know that the branch provides a guarantee without the authorization of the guarantee company.
If a branch of the company provides a guarantee to the outside world, and the relative is not in good faith and requests the company to bear the liability for compensation, it shall be handled with reference to the relevant provisions of Article 17 of this interpretation.
2. Interpretation of the Supreme People's Court on Several Issues concerning the Application of the the People's Republic of China Guarantee Law (Fa Shi [2000] No. 44) Article 17
If a branch of an enterprise legal person provides a guarantee without the written authorization of the legal person, the guarantee contract shall be null and void. Therefore, if a loss is caused to the creditor, it shall be dealt with in accordance with the provisions of Article 5, paragraph 2, of the Security Law.
If a branch of an enterprise legal person provides a guarantee with the written authorization of the legal person, if the scope of the written authorization of the legal person is unclear, the branch of the legal person shall bear the guarantee responsibility for all the debts stipulated in the guarantee contract.
If the property operated and managed by a branch of an enterprise legal person is not sufficient to bear the guarantee liability, the enterprise legal person shall bear civil liability.
If a branch of an enterprise legal person shall bear the liability for compensation after the guarantee provided by the branch is invalid, it shall be borne by the property managed by the branch. If an enterprise legal person is at fault, it shall be dealt with in accordance with the provisions of Article 29 of the Guarantee Law.
3. Article 16 of the the People's Republic of China Company Law (as amended in 2018)
The company's investment in other enterprises or the provision of guarantees for others shall, in accordance with the provisions of the company's articles of association, be resolved by the board of directors or the shareholders' meeting or the general meeting of shareholders; if the company's articles of association stipulate a limit on the total amount of investment or guarantee and the amount of a single investment or guarantee, it shall not exceed the prescribed limit.
Where a company provides a guarantee for the shareholders or actual controllers of the company, it must be resolved by the shareholders' meeting or the general meeting of shareholders.
The shareholders specified in the preceding paragraph or the shareholders controlled by the actual controller specified in the preceding paragraph shall not participate in the voting on the matters specified in the preceding paragraph. The vote shall be passed by a majority of the voting rights held by other shareholders present at the meeting.
4. Minutes of the National Court Conference on Civil and Commercial Trials (Law [2019] No. 254)
17. [Violation of Article 16 of the Company Law constitutes ultra vires representative] In order to prevent the legal representative from providing guarantees for others on behalf of the company at will, causing losses to the company and harming the interests of small and medium shareholders, Article 16 of the Company Law restricts the representation of the legal representative. According to this article, the act of guarantee is not a matter that can be decided by the legal representative alone, but must be based on the resolution of the company's shareholders (general) meeting, board of directors and other corporate organs as the basis and source of authorization. If the legal representative provides security for others without authorization, it constitutes an ultra vires representative, and the people's court shall, in accordance with the provisions of Article 50 of the Contract Law on the ultra vires representative of the legal representative, distinguish whether the creditor is in good faith at the time of the conclusion of the contract to determine the validity of the contract: if the creditor is in good faith, the contract is valid; otherwise, the contract is invalid.
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