Analysis on liability of listed companies illegal guarantee
Source: Beijing DOCVIT Law Firm Time: 2020-12-30 10:24:16 Author: The dispute resolution team
Abstract: It has been one year since the promulgation of the Minutes of the National Courts' Civil and Commercial Trial Work Conference (hereinafter referred to as the “Conference Minutes”) ，the six part of which stipulates the issue of "companies providing guarantees for others". According to Conference Minutes, a guarantee contract of the listed company providing guarantee in violation of regulations shall be deemed invalid. However, even if the guarantee contract is found to be invalid, it does not completely exempt the listed companies from their responsibilities. The listed company may still be required to bear half of the compensation liability of the debtor's insolvent part due to its faults. Combined with the latest judicial judgement point of view, this article makes a legal analysis on the liability of listed companies for illegal guarantee.
01. The validity of the guarantee contract and the responsibility of the listed company when the listed company violates the rules to provide guarantees for others
Article 16 (1) and (2) of the Company law of the people's Republic of China (hereinafter referred to as the “Company Law”) stipulate the requirements of the company's internal resolution for external guarantee：
“ where a company intends to invest in any other enterprise or provide guaranty for others, the company shall make a resolution through the board of directors, shareholders' meeting or shareholders' assembly according to its bylaw. If the bylaw prescribe any limit on the total amount of investments or guaranties, or on the amount of a single investment or guarantee, the aforesaid total amount or amount shall not exceed the limited amount. If a company intends to provide guaranty to a shareholder or actual controller of the company, it shall make a resolution through the shareholder's meeting or shareholders' assembly.”
According to Article 17 of the Conference Minutes, “violation of Article 16 of the Company Law constitutes ultra vires representation.” In this case, it is necessary to distinguish whether the creditor is in good faith. If the creditor is in good faith, the guarantee contract is valid; otherwise, the guarantee contract is invalid. Due to the higher requirements of information disclosure of listed companies, listed companies generally need to disclose the articles of association, the resolution of the general meeting of shareholders, the resolution of the board of directors and so on. Therefore, the courts put forward higher review obligation requirements for creditors to who listed companies provide guarantee in judicial practice.
However, even if the guarantee contract is found to be invalid, it does not completely exempt the listed companies from their responsibilities. According to Article 20 of the Conference Minutes, if a guarantee contract is invalid, although the creditor's request for the company to undertake the guarantee liability may not be supported, it may be dealt with according to the provisions of the guarantee law and relevant judicial interpretations on the invalidity of the guarantee. According to Article 7 of Judicial Interpretation of the Supreme People's Court on Some Issues Regarding the Application of the Guarantee Law of the People's Republic of China (hereinafter referred to as the “Judicial Interpretation of the Guarantee Law”), “if the main contract is valid but the guarantee contract is invalid and the creditor is not at fault, the guarantor and the debtor shall be jointly and severally liable for the economic losses of the creditor; if the creditor or the guarantor is at fault, the part of civil liability borne by the guarantor shall not exceed half of the part that the debtor cannot pay off.” Therefore, even if the guarantee contract is found to be invalid, the creditor can still claim that the listed company should bear half of the compensation liability of the debtor’s insolvent portion. According to the judgment of judicial practice, the situation of the listed company affixing the official seal and its legal representative signing in the guarantee contract may lead to the conclusion that the listed company has fault liability for improper internal management, where the listed company shall bear the corresponding liability for compensation.
02. Judicial judgement point of view
(1) The case of contract dispute between Yiyang company and Xintong Company
In this case, Qu Fei, the legal representative of the Xintong Company, decided to provide guarantee for others without the resolution of the general meeting of shareholders in accordance with the articles of association, which is one of the reasons for the invalidity of the guarantee contract. Qu Fei's act of signing the guarantee contract in the name of the legal representative of Xintong company was a duty act and the guarantee contract was also stamped with the official seal of Xintong company, so Xintong company shall be responsible for the consequences of Qu Fei's duty act. Xintong company has subjective fault for the invalidity of the guarantee contract, so it shall bear the corresponding responsibility. Liuhe bank did not perform the duty of careful review on the authority of Xintong company to sign the guarantee contract, which was also a reason for the invalidity of the guarantee, so Liuhe bank should also bear the corresponding responsibility. On the premise that the guarantee contract involved in the case was invalid, the Supreme People's court held that the above fault degrees of Liuhe bank and Xintong company were roughly the same. Therefore, according to Article 7 of the Judicial Interpretation of the Guarantee Law, Xintong company shall bear 50% of the compensation liability for the part of debts that cannot be paid off by the debtor Yiyang company.
(2) The case of dispute between Antong company and Ankang trust
The guarantee contract involved in this case was stamped with the official seal of Antong company and signed by Guo Dongze, the legal representative. According to the public materials of Antong company, in 2017, the year that the guarantee contract was signed, after review of Antong company, Huapu accounting firm issued the special audit report on the occupation of funds by controlling shareholders and other related parties in 2017, which made it clear that there was no fact that listed companies provided guarantees in violation of the articles of association. There was no major defects in the Internal Control System Evaluation Report of Antong company in 2017. The above facts proved that the internal management of Antong company was not standardized, which made contributions to the invalidity of the guarantee contract. In addition, Ankang trust did not submit sufficient and effective evidence to prove that it reviewed the resolution of the general meeting of shareholders of Antong company when signing the guarantee contract involved in the case, which was also a important reason for the invalidity of the guarantee contract. Therefore, in accordance with Article 7 of the Judicial Interpretation of the Guarantee Law, the Supreme People’s Court held that Antong company shall be liable for half of the debts that Guo Dongze could not pay off under the difference compensation and assignment agreement.
In accordance with the point of view of the Conference Minutes and the current judicial judgement, the illegal guarantee of listed companies is generally considered invalid. However, in the case that the creditor is unable to require the listed company to undertake guarantee liability, according to the Article 7 of the Judicial Interpretation of the Guarantee Law, the creditor may require the listed company to bear half of the compensation liability of the debtor’s insolvent part in view of the fault of the listed company in providing guarantee, which is also a relief way to make up for the loss.
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