Perspective | Practical Points on a Guarantor’s Right of Recourse Against the Principal Debtor After Making Compensation

The primary difference between general guarantee and joint and several guarantee lies in the different conditions under which the guarantor’s liability begins to accrue. Article 687 of the Civil Code stipulates that a general guarantor enjoys “ Right of prior suit “—that is, a general guarantor may refuse to assume guarantee liability as long as the underlying contract dispute remains unresolved through trial or arbitration and cannot be fully satisfied even after compulsory enforcement. Only when the creditor has brought a lawsuit against the principal debtor and, despite enforcement efforts, the debt remains unpaid, is the general guarantor typically required to step in and make payment on behalf of the debtor. This means that, in most cases, a general guarantor will only fulfill its guarantee obligations after the debt has been confirmed by a court and enforcement efforts have proven unsuccessful; moreover, any right of recourse against the principal debtor usually hinges on an already effective judgment or mediation agreement. By contrast, a joint and several guarantee does not confer the right of prior suit defense. Once the debt repayment period expires and the debtor fails to pay, the creditor can directly demand that the guarantor assume full responsibility. Consequently, under a joint and several guarantee, the guarantor may be required to make payment even before the principal debtor’s liability has been established by a court judgment; thus, any subsequent recovery action against the principal debtor often necessitates a separate lawsuit aimed at confirming the debtor’s obligation.”

Since, under a general guarantee, the guarantor can only step in to repay the debt after the principal debtor has been subject to enforcement proceedings through litigation, in practice creditors typically name both the principal debtor and the general guarantor as defendants when filing a lawsuit. Court judgments usually first establish the principal debtor’s obligation to pay; only after the debtor fails to fulfill this obligation will the court then rule that the general guarantor bears the responsibility for repayment. In such cases, the judgment may explicitly state that “after the guarantor has made payment, it shall have the right to seek reimbursement from the debtor.” By contrast, under a joint and several guarantee, since the creditor can directly sue the guarantor, in some instances the principal debtor may not be sued at all or may not be listed as an enforced party. In these situations, if the original enforceable legal document does not expressly grant the guarantor a right of recovery, the guarantor will need to file a separate lawsuit against the principal debtor, obtain a judgment, and then proceed with enforcement. Thus, in the case of a general guarantee, recovery is often already integrated into the original litigation procedure, whereas in the case of a joint and several guarantee, recovery typically requires initiating a separate legal proceeding.

It is important to note that if a general guarantor voluntarily waives the right of prior recourse and makes advance repayment to the creditor, such action constitutes a disposition of its own rights and should be respected. However, during the recovery phase, the principal debtor may argue that the guarantor’s payment was made before the guarantor’s obligation to assume liability had actually arisen. In such cases, courts tend to prioritize safeguarding the realization of the creditor’s rights: as long as the debt has indeed become due and the guarantor’s performance has reduced the debtor’s liabilities, the debtor remains obligated to repay the amount paid on behalf of the debtor. That said, if the guarantor proactively settles the debt before the creditor has satisfied the conditions for prior recourse—thus even rendering the principal debtor’s original defenses ineffective—the guarantor’s claim for reimbursement may be subject to particularly stringent scrutiny. For instance, according to relevant interpretations issued by the Supreme People’s Court, if a guarantor assumes liability despite knowing that the statute of limitations for the principal debt has already expired, any subsequent claim for reimbursement against the debtor will not be supported (unless the debtor voluntarily waives the defense of statute of limitations). Thus, in cases involving general guarantees, guarantors should exercise their right of defense with moderation: they must avoid making premature repayments that could leave them in a passive position from which recovery becomes impossible, while also preventing excessive delays that might result in the creditor’s claims going unenforced.

Common defenses raised by the principal debtor in a subrogation action against the guarantor include: the principal debt does not exist or has been fully performed; the creditor and debtor have engaged in set-off; the underlying contract is invalid or has been rescinded; or the debtor has valid defenses against the creditor. In such cases, the guarantor should first ensure that its act of indemnity is supported by both legal and factual grounds—that is, the original debt is genuine and lawful, and the guarantor’s liability has indeed arisen. If the principal debtor claims that the debt is invalid or has already been fulfilled, the guarantor must provide evidence to substantiate the validity of the debt itself as well as the genuineness and necessity of its own indemnity (e.g., if the indemnity was based on an enforceable judgment or arbitral award). According to the law, the guarantor may also invoke any defenses that the debtor has against the creditor—for instance, the debtor’s right to claim simultaneous performance or objections to jurisdiction. However, once the guarantor has actually made payment on behalf of the debtor, most of the defenses between the debtor and the creditor have already been resolved in the original proceedings. In subrogation actions, it is more common for the debtor to raise defenses concerning the amount or scope of the indemnity paid. In this regard, the... Interpretation of the Guarantee System It is clarified that if the guarantor’s liability exceeds the scope of responsibility that the debtor should bear, and the debtor claims to repay only within the scope of its own liability, the court shall uphold such claim. For example, if the main contract stipulates a high liquidated damages clause resulting in the guarantor’s total compensation exceeding the legal limit, the debtor may raise this as a defense and request deduction of the excess amount. In case No. (2019) Lu 0303 Min Chu 1175, the guarantee company claimed that the total interest and guarantee fees paid on behalf of the debtor amounted to a monthly interest rate of 2.4%. Ultimately, the court upheld only the portion corresponding to lawful interest and reasonable guarantee fees. Therefore, the guarantor should carefully review the original composition of the creditor’s rights and, when making reimbursement, exclude any amounts that might exceed legal protection—such as excessively high interest or liquidated damages—before seeking recovery.

When the primary debtor genuinely lacks sufficient assets to make repayment, the guarantor faces practical difficulties in seeking reimbursement. In this regard, the following approaches could be considered: Early Preservation and Investigation: The guarantor shall promptly take measures to investigate and preserve the debtor’s assets both before and after making compensation. After making compensation, while filing a lawsuit to recover the debt, the guarantor may also apply for property preservation measures, such as seizing the debtor’s real estate, vehicles, bank deposits, and other assets. Subrogation of Security Rights: If the principal debtor has provided collateral (such as a mortgage or pledge), after the guarantor has made repayment on behalf of the debtor, the guarantor is entitled to step into the position of the creditor and exercise the security interest. Therefore, the guarantor should promptly ascertain whether any collateral, such as a mortgage, exists, and after making repayment, should pursue enforcement proceedings or file a separate lawsuit. Realize the monetization and satisfaction of claims against the collateral. This is an important avenue for securing recovery when the debtor has no other assets. Pursue Counter-guarantee Human responsibility: If the principal debtor provides counter-security to obtain the guarantee—for example, by providing collateral to the guarantor or having a third party provide a guarantee to the guarantor—then after stepping in to make payment on behalf of the debtor, the guarantor may also assert its right to reimbursement against the counter-guarantor pursuant to the counter-security agreement. In effect, this amounts to seeking recovery from another liable party, thereby mitigating the losses arising from the principal debtor’s inability to repay. The guarantor should pay close attention to the contractual provisions and scope of the counter-security agreement and exercise its rights within the scope and priority stipulated in the counter-security agreement.

The bankruptcy of the primary debtor has a significant impact on the guarantor’s right of recovery, and it is necessary to distinguish between different scenarios:

(1) Debtor’s bankruptcy liquidation: The debtor’s bankruptcy does not automatically discharge the guarantor’s liability. The creditor may choose to file a claim in the debtor’s bankruptcy proceedings, obtain partial repayment, and then pursue the remaining balance from the guarantor; alternatively, the creditor may choose not to participate in the bankruptcy distribution and instead directly demand full repayment from the guarantor. In practice, it is common for creditors to file claims for the full amount of their debts during the bankruptcy proceedings and then seek reimbursement from the guarantor for any shortfall after the distribution has been completed. For the guarantor, the key lies in exercising their rights in a timely manner. Right of subrogation Once a guarantor has fulfilled its guarantee obligations, it is entitled to participate in the bankruptcy distribution as a creditor, thereby securing a certain proportion of repayment in the bankruptcy proceedings. For example, in a counter-guarantee case, the Supreme People’s Court ruled: “After a guarantor has performed its repayment obligation, it may, in accordance with the law, file a claim with the court that has accepted the bankruptcy of the principal debtor within the scope of its repayment liability.” Therefore, guarantors should closely monitor the debtor’s bankruptcy proceedings and promptly file subrogation claims. If, due to reasons attributable to the creditor, the guarantor fails to receive timely notification and thus misses the filing deadline, the Interpretation of the Guarantee System provides that: if a creditor knowingly or ought to have known about the debtor’s bankruptcy but neither filed a claim nor notified the guarantor, resulting in the guarantor being unable to file a claim in advance, the guarantor shall be exempted from its corresponding guarantee liability to the extent that it could have been compensated in the bankruptcy proceedings. In other words, the guarantor may use this defense to reduce its own repayment obligations.

(2) Debtor Reorganization/Reconciliation ： After a reorganization plan or settlement agreement has been approved by the court and fully implemented, the debtor’s original debts may be partially discharged or adjusted. However, such adjustments do not bind the debtor’s guarantors; creditors can still seek recovery of any shortfall from the guarantors according to the original terms of the debt. Once the guarantor has made full payment, can it then seek reimbursement from the debtor who has successfully undergone reorganization or reached a settlement? According to Article 23 of the Interpretation of the Security System, if a guarantor assumes guarantee liability and subsequently seeks reimbursement from the debtor after the settlement agreement or reorganization plan has been fully executed, the court will not support such claims. This means that once the debtor’s debt has been reduced or discharged for statutory reasons following reorganization or settlement, the guarantor cannot “revive” the discharged debt through its right of recourse. For guarantors, a more prudent approach is to communicate promptly with creditors during the debtor’s reorganization or settlement proceedings, actively participate in creditor claims filing or take over existing claims whenever possible, thereby avoiding the unfavorable situation where, after making compensation, the guarantor finds itself unable to recover from the debtor. Once the procedural window has passed, after the guarantor has made compensation, it can only enjoy rights within the scope of the reorganization plan—for example, becoming a creditor entitled to receive repayment under the reorganization plan—but any amount exceeding that scope will remain unrecoverable from the debtor.

The primary scope of a guarantor’s right of recovery is the principal amount and interest of the main debt that the guarantor has paid on behalf of the debtor. The principal amount is typically based on the loan contract or the debt acknowledgment. The guarantor must provide evidence to substantiate the original principal amount and the repayment status, thereby calculating the outstanding principal balance at the time of reimbursement. As for interest, this includes both the interest agreed upon in the contract and any interest accrued after the debtor’s default (including penalty interest). The guarantor should furnish the provisions of the main contract regarding the interest rate and the method of interest calculation, as well as detailed records of how the creditor has calculated the interest (such as bank statements or interest schedules), to prove the total amount of interest paid at the time of reimbursement. It is important to note that the interest recovered by the guarantor must not exceed the limits protected by law. According to relevant regulations issued by the Supreme People’s Court, interest rates exceeding 24% per annum in private lending are not legally protected; similarly, the “Opinions on Financial Trials” set 24% annual interest rate as the upper limit of judicial protection for financial loans. Therefore, if the creditor has charged excessively high interest or penalty interest, the guarantor, when seeking recovery, should adjust the interest calculation accordingly, claiming only the portion of interest that is legally permissible, thus avoiding potential reductions ordered by the court. Key points for providing evidence include: presenting the basis for calculating interest (the interest rate clauses in the contract and any changes in the interest rate), as well as supporting documents proving that such interest was actually paid (such as bank payment records). In the case of Yunnan Yingmao Group v. Tianyuan Company regarding the recovery under the guarantee contract, the plaintiff’s reimbursement included loan interest. Ultimately, the court upheld the recovery of both the principal amount and the legally protected interest. This type of case demonstrates that, provided sufficient evidence is available, both the reimbursed principal and the interest protected by law fall within the scope of recovery.

If the principal debt contract stipulates liquidated damages, late-payment penalties, or other similar charges, or if the debtor’s default results in actual losses, the guarantor may be required to assume these expenses when making reimbursement on behalf of the debtor. With regard to liquidated damages and late-payment penalties, the guarantor should pay close attention when seeking recovery to ensure that their amounts do not exceed the statutory or judicially interpreted limits—for example, the upper limit on interest rates for private lending or the standard for reducing excessively high liquidated damages at the court’s discretion. If the liquidated damages are deemed excessive, the debtor is likely to raise a defense requesting an adjustment. Therefore, the guarantor should prepare evidence in advance to demonstrate the reasonableness of the liquidated damages—for instance, that the amount roughly corresponds to the actual losses incurred or does not exceed 30% of the value of the principal contract—to persuade the court to uphold its claim. As for compensation for actual losses—such as additional expenses incurred by the creditor due to the debtor’s default—the guarantor may also include such expenses within the scope of recovery if it has already paid them on behalf of the debtor. For example, costs necessary for realizing the creditor’s rights, such as appraisal fees and auction fees arising from the debtor’s default, can be claimed back from the debtor after the guarantor has paid them. In short, any claim for such expenses must be based on provisions in the principal contract or legal requirements, and the guarantor must provide evidence of actual payments made. It is important to note that if these expenses result from the creditor’s own fault—for instance, if the creditor fails to exercise its rights in a timely manner, thereby causing the loss to escalate and triggering additional penalty interest—the guarantor’s right to recover these expenses may not be upheld or could even be reduced at the court’s discretion. Therefore, before making reimbursement, the guarantor should carefully verify with the creditor the reasonableness of both the liquidated damages and any compensation payments, so as to avoid bearing expenses that should not have been borne by the guarantor in the first place.

Reasonable expenses incurred by the guarantor in pursuing the creditor’s rights are also within the scope of reimbursement. The expenses incurred in enforcing the creditor’s rights shall be limited to: Necessary and reasonable for the realization of the principal claim. the scope. Excessive fees or unnecessary expenditures may not be supported. The guarantor should adhere to the principle of minimizing losses, rationally select means of protecting rights and interests, and keep necessary expenses within the limits permitted by law; only then can the reimbursed expenses be smoothly included in the scope of recovery.

In the practice of guarantee contracts, whether the creditor promptly notifies the guarantor of its obligation to perform the guarantee liability may affect the scope of the guarantor’s liability; however, generally... This does not affect the validity of its existing right of recourse. Different situations need to be distinguished and discussed separately:

Article 693 of the Civil Code establishes the system of the guarantee period: In a general guarantee, if the creditor fails to sue the principal debtor within the guarantee period, the guarantor’s liability shall be extinguished; in a joint and several guarantee, if the creditor fails to demand that the guarantor assume liability within the guarantee period, the guarantor’s liability shall also be extinguished. If the creditor neglects to notify or sue the guarantor within the guarantee period, resulting in the guarantor’s liability being exempted by law, the guarantor will no longer be required to make compensation, and there will consequently be no issue of subsequent recovery. For example, in case ((2021) Lu 14 Min Zhong No. 657), the creditor sued only some of the guarantors, while another guarantor was exempted from liability because its responsibility had not been claimed during the guarantee period. Based on this, the court dismissed the claim brought by the guarantor who had already made compensation against that exempted guarantor for reimbursement. As such, if the creditor’s delay in exercising its rights leads to one guarantor being exempted from liability, the other guarantors’ right to seek reimbursement from that exempted guarantor will likewise be frustrated. However, this situation does not mean that the creditor’s notification obligation directly affects the guarantors’ right to recover damages; rather, it is because the guarantor’s liability itself never arose or was partially exempted, leaving the guarantor unable to pursue recovery.

In practice, it is more common for creditors to fail to promptly demand or notify the guarantor to step in and make repayment, resulting in continued accumulation of interest and default penalties on the debt and thereby increasing the guarantor’s burden. In such circumstances, can the guarantor claim that they should not be held liable for the portion of the debt that has increased due to the delayed notification? Currently, the law does not explicitly stipulate the creditor’s duty to notify and its legal consequences in ordinary breach-of-contract scenarios. However, from an equitable standpoint, the guarantor may invoke the rule set forth in Article 3 of the Interpretation of the Security System when seeking reimbursement—that is, “If the guarantor’s liability exceeds the scope that the debtor should bear, the debtor shall only be required to repay within the scope of its own liability.” If the creditor’s failure to notify promptly leads to the accrual of additional interest that the debtor would not otherwise have been required to pay, after the guarantor has made repayment, the debtor would have grounds to argue against paying this extra interest. For example, suppose the principal debtor defaults, and interest begins accruing daily thereafter; yet the creditor delays notifying the guarantor, waiting half a year before demanding that the guarantor step in and make repayment, thus causing substantial late-payment interest to accumulate. When the guarantor seeks reimbursement, the debtor could argue that only the original principal amount and interest accrued within a reasonable period should be repaid, but the debtor should not be responsible for the additional interest incurred during the delay, since the creditor’s failure to fulfill its notification obligation was at fault. A similar principle has already been reflected in bankruptcy proceedings: after a debtor’s bankruptcy is accepted, interest on claims ceases to accrue, and the guarantor is not liable for any interest accrued after the bankruptcy filing. Although there is no explicit provision for this in general debt cases, courts might nonetheless take this principle into account on a discretionary basis. In short, if the creditor’s failure to notify promptly results in an increase in the debt, the guarantor may seek to reduce their own repayment obligation or correspondingly lower the amount they seek to recover from the debtor, thereby preventing the creditor from neglecting its rights while leaving the guarantor and debtor to bear the adverse consequences.

When a debtor enters bankruptcy proceedings, the creditor has an obligation to notify the guarantor so that the latter can exercise its right of recourse. If the creditor, knowing full well that the debtor has gone bankrupt, neither files a claim nor notifies the guarantor, thereby causing the guarantor to miss the opportunity to assert its right of recourse in the bankruptcy proceedings, judicial interpretations stipulate that the guarantor shall be exempted from liability for the portion of the debt that could have been recovered in the bankruptcy. For example, suppose a debtor undergoes bankruptcy liquidation, and the creditor fails to inform the guarantor to file a claim. As a result, after the guarantor has fully compensated the creditor, the bankruptcy proceedings come to an end, leaving the guarantor unable to recover any funds from the debtor. According to the relevant provisions, the portion of the debt that the guarantor could have received in the bankruptcy distribution should be deducted from its repayment obligation to the creditor. This effectively protects the guarantor’s interests and indirectly influences the guarantor’s path to realizing its right of recourse: since the guarantor is exempted from liability for that portion, it naturally does not need to seek reimbursement from the debtor for that same amount. This rule underscores the importance of the creditor’s notification obligation. However, the interpretation also clarifies that if the guarantor itself was at fault—for instance, having known about the bankruptcy but failing to timely exercise its right of recourse—it will not be exempted from liability. Therefore, in bankruptcy proceedings, failure by the creditor to provide timely notification will reduce the guarantor’s compensation liability, thus lowering the amount the guarantor ultimately needs to recover from the debtor.

In summary, under normal circumstances, the creditor’s failure to provide timely notice does not directly deprive the guarantor of their right of recourse; however, it may affect the scope and amount of the recourse claim. The guarantor may argue in the recourse proceedings that any additional debt incurred due to the creditor’s delay should be borne by the creditor itself or that the debtor should be exempted from liability. If possible, before assuming guarantee liability, the guarantor should also proactively communicate with the creditor to stay informed about the progress of the debt default and intervene as early as possible to avoid missing the optimal window for pursuing recourse.