On Justification For The Effect Of Foreign Guarantee Of Incorporation

Guarantee system derives from the development of economy, which can improvethe probability of obtaining indemnity for creditor and lower the risk of creditor intransaction and as a result, it can satisfy more needs of creditor on financing andpromote the economic development. The mutual guarantee between incorporationshas become an important means of financing since lots of incorporations havefinancing needs in business activities, especially for those small and medium-sizedenterprises. Based on the fact that the current guarantee system in China is notcomplete, the study on current guarantee system in China is of great significance inorder to regularize the foreign guarantee of incorporations and lower the risk thatcreditor may meet during signing guarantee contract. There are specific regulationson issues such as the capacity, decision-making organs and procedures and therestrictions on foreign guarantee of incorporations in the Corporation Law, in termsof which it can be relatively mature legislation, however, the relevant provisions onforeign guarantee of incorporations focus too much on the procedures withoutmaterial rigid standards. In Corporation Law, most of the rights under foreignguarantee are given to articles of incorporation; nevertheless, it covers the specificprovisions on the results caused by violating the articles of incorporation.As the first part of this paper, the introduction points out the problem throughArticle16, Paragraph1of the current Corporation Law and lists some possible casesin which the company can provide guarantee for people except from shareholders oractual controllers by violating the articles of incorporation.For the core of this paper, Chapter One illustrates firstly that it is necessary to setrestrictions through articles of incorporation when the corporation provides foreignguarantee. Meanwhile, it is also indicated in relevant provisions in currentCorporation Law in China that it is requisite for the standardization of foreignguarantee of corporation to set restrictions; secondly, the approaches for articles ofincorporation to set restrictions on foreign guarantee are analyzed according to regulations and provisions in Corporation Law. One is permitting the foreignguarantee of incorporations conditionally as required in articles of incorporation; theother is explicitly prohibiting the foreign guarantee of incorporations. Among which,restrictions on decision-making organs, decision-making procedures, guarantee limit,etc. are included in the first approach.Chapter Two is about the study on foreign guarantee of incorporations throughcomparison method. Representative guarantee systems in various regions areelaborated and the legislation models and practical effect in the UK, USA and Taiwanare compared.Based on the normative nature of Article16in Corporation Law, the effect ofarticles of incorporation and the examination duty of creditor on articles ofcorporation and relevant resolutions, Chapter Three concludes the theoretical basisand reasonability of different opinions concerning the question that if the foreignguarantee and the guarantee contract are effective in circumstances of violatingarticles of incorporation and some ideas are put forward on that basis.Chapter Four is about the preconditions and legitimate discussion and analysisabout the foreign guarantee by violating articles of incorporation. The only effectiveprecondition for that is the goodwill of the creditor; therefore the standard ofpresumption on the goodwill of creditor is discussed. Meanwhile, some basictransaction principles in modern transaction and private law also serve as the effectiveand reasonable ground for foreign guarantee through violating articles ofincorporation, such as protective principle of administrative trust, principle ofefficiency and principle of guaranteeing transaction safety and maintaining thestability of contract. Following the abovementioned principles can lead the foreignguarantee which violates the articles of incorporation to effective behavior.The last part is the comprehensive conclusion about the whole paper, which alsoindicates that the protection legislation for the interest of incorporations andshareholders needs to be improved.