Study Of The Effectiveness Of Corporate Guarantee

The corporate guarantee is one of the most important means of company’s daily operations. As the economy development continues, guarantee providing has played an important role in the company’s business operation by enhancing the credibility of the company, maintaining or developing a good business relationship and creating more business opportunities, the funds in the market can be fully utilized as well, such result accelerates the development of market economy, the effect is positive. Since corporate guarantee has significant effect, almost all the jurisdictions around the world have recognized the company’s ability to provide guarantee.But corporate guarantee is different from the normal operations of the company, which provides direct economic benefits to the company, company’s benefits from providing guarantee is limited, but the risk is relatively high. Additionally, the company’s guarantee providing not only involves the interests of itself, but also has a great impact on the interests of shareholders and creditors of the company. If the company’s ability to provide guarantee is abused, the purpose of enhancing the company’s reputation and promoting the development of a market economy cannot be reached, such abuse will cause great damage on company’s shareholders and creditors. Therefore, legislations often impose restrictions on corporate’s ability to provide guarantee.The provisions about corporate guarantees is mainly reflected in Clause 16 of the Corporate Law(revised in 2005 and became effective in 2006), the Corporate Law has been revised in 2013, but the content of Clause 16 has been retained. Clause 16 governs company’s providing of guarantee to third party and its shareholders or actual controllers. If the company to provides guarantee to the third party, such providing shall be consistent with the provisions of the Articles of Association, and shall be decided by the board of directors or the shareholders; if the amount of the guarantee is limited by the Articles of Association, such limitation shall prevail.If the company provides guarantees to its shareholders or actual controllers, such guarantee must be decided by the shareholders, and the interested shareholder is not allowed to vote. Compared with provision in the Corporate Law(1993 Version), the provisions in the Corporate Law(2006 Version) is clearer. But courts have different understanding about the application of such provisions, cases with same facts may have different rulings. The effectiveness of guarantee contracts that are inconsistent with Clause 16 is still controversy in the academic community. This thesis aims to analysis different opinions, then come up with my own ideas and make the application of Clause 16 clear.The first part of this thesis introduces the legislation backgrounds of corporate guarantee. The introduction of current rules about corporate guarantee come first, then there are three cases from courts in Beijing, Shanghai and Zhejiang Province, which reflects different understandings of Clause 16’s application. Meanwhile, this thesis analysis a lot of cases and summarize the logic of different courts’ application of Clause 16.The second part of this thesis analysis the legal theory of corporate guarantee. First, both the corporate regulations and the academic community have agreed that a company has the ability to provide guarantees, but restrictions are imposed on such ability for the purpose of preventing the abuse of such ability. Then, this thesis proposes that Clause 16 is a mandatory rule on effectiveness, and the logic- makes the judgement about the effectiveness of a guarantee contract based on the nature of the rules is not reasonable. A better logic would be to analysis the effectiveness of the guarantee under ultra vires. Therefore, the key issue becomes whether the guarantor has the obligation to review the Articles of Association of the company and if the answer is yes, what is the degree of such obligation. The third part of this thesis addresses such issue.The third part of this thesis focuses on the impact imposed by the Articles of Associations on corporate guarantee. Articles of Association is the principle of company’s operation, all person in the company is bound by the Articles of Association. But whether the third party, particularly the guarantor is bound by the Article of Association is controversial. But from my perspective, the legislation has already empowered the Articles of Association to govern the corporate guarantee, then the guarantor cannot argue that is not aware of the content in the Articles of Association, in a word, the guarantor is obligated to review the Articles of Association, and the guarantor cannot be treated as in good faith if he/she fails to perform such obligation. Further, this thesis focus on the guarantor’s review obligation. Generally speaking, the guarantor shall review the Articles of Association formally, but such obligation shall be decided by the nature of the corporate(whether the corporate is a public corporate or a private one). This thesis also proposes solution for the situation that the Articles of Association is silent in the corporate guarantee issue.The forth part of this thesis introduces corporate guarantee legislation in other countries and Taiwan. Taiwan and the mainland China all belong to the continental legal system, and learned from each other. But the regulations in Taiwan re the corporate guarantee issue is too strict to match the need of market development, therefore, the companies in Taiwan always set such rules around. In addition to Taiwan’s rules, this thesis briefly introduce the regulations in USA and UK, the rules in USA, the “corporate interest” rule, is established by a series of cases, which has been followed by many countries. But the economy and corporate structure in USA is mature, the “corporate interest” is applicable there. In terms of China, it is not practicable to adopt all the rules from USA, to adopt such rule after election may be more reasonable.