The Validity And Legal Consequences Of A Company’s Ultra Guarantee

The legislation does not answer the question of “the validity of a guarantee given by the legal representative of a company in the name of the company without a valid resolution of the company’s competent resolution body,in violation of Article 16 of the Company Law”,which has become a long-standing problem for civil and commercial law scholars.The root of the problem lies in the fact that the differences in thinking between civil law and commercial law collide on a compound issue,thus allowing us to see different paths of thinking.The theoretical circle and judicial circle have tried to find a solution and have reached different conclusions through different interpretative paths.Initially,there was a debate on whether the nature of Article 16 was a mandatory rule for validity or a mandatory rule as the standard,and later there was a debate on whether the path of interpretation should start from the nature or the purpose of the article.In the competition between the “Theory of identification of the nature of the norm” and the “Theory of limitation of the right of representation”,the latter gradually prevailed and became the mainstream view generally accepted by the theoretical circle.At the same time,with the ‘Supreme People’s Court’s Minutes of the National Courts’ Civil and Commercial Trial Work Conference’ and the ‘Interpretation of the Supreme People’s Court of the Application of the Relevant Guarantee System of the Civil Code of the People’s Republic of China’,the Courts’ views on the validity of ultra guarantee for legal representatives of companies are gradually becoming more uniform,and are in line with the main view of the “Theory of limitation of the right of representation”.However,this “patchwork” solution has not settled the issue.Under the framework of the “Theory of limitation of the right of representation”,Article 16 of the Company Law is not a mandatory rule for validity,but only an internal autonomy rule of the company,which cannot directly bind counterpart.Therefore,the validity of the ultra guarantee contract signed by the legal representative must be determined in conjunction with the provisions of Article 61 and Article 504 of the Civil Code.This article argues that the property covered by the legal representative’s ultra guarantee concerns not only the interests of the company,but also the interests of the company’s shareholders(especially minority shareholders)and other creditors of the company.Therefore,the best way to determine the validity of the legal representative’s ultra guarantee should be premised on the priority application of the relevant provisions of the Company Law,firstly deciding whether the legal representative constitutes an ultra guarantee and then linking to the provisions of Articles 61 and 504 of the Civil Code.Under this logic of application of the law,the subjective state of the counterpart in evaluating the validity of an ultra guarantee contract becomes the key to determining the validity of this contract.However,the subjective level of judgement on good faith is too abstract and not conducive to operation,so it still has to be implemented at the objective level,i.e.whether the counterpart has fulfilled its duty to examine.There was a clear disagreement in theoretical circle and judicial circle as to whether and to what extent the counterpart had a duty of examination,but this debate came to an end with the introduction of ‘Interpretation of the Supreme People’s Court of the Application of the Relevant Guarantee System of the Civil Code of the People’s Republic of China’.The difficulty lies in the fact that there is still the problem of unclear standards of reasonable duty of examination,which brings problems to judges in the concrete application of judicial practice.Considering that the scientific identification of bona fide counterpart is by no means only a technical problem,but also a problem of balanced allocation of rights,involving the balanced allocation of rights between the company,shareholders and other creditors.Therefore,this article firstly affirms that the counterpart should bear the duty of examination,but not the harsh substantive examination nor the lax formal examination,but the prudent and reasonable examination duty based on the principle of “Four concerns”.In addition,the standard for judging the good faith of the counterpart is not limited to “actual knowledge or constructive knowledge that the legal representative had exceeded his or her authority”,and the rule has been upgraded by introducing the standard of“actual knowledge or constructive knowledge that the legal representative had breached his or her trust”,i.e.in examining whether the legal representative had in fact acted beyond his or her authority.In other words,before examining whether the legal representative has in fact exceeded his or her authority,a judgment is made as to whether the counterpart is acting in good faith by determining whether the counterpart knew that the legal representative had breached his or her fiduciary duties,and then a more comprehensive and clearer assessment is made of the subjective state of the counterpart by combining the criteria for determining ultra vires act.It is undeniable that “actual knowledge or constructive knowledge that the legal representative had breached his or her trust” is still at the stage of system conception because it involves the landing of the legal representative’s fiduciary duty system,but at the time of the revision of the Company Law,it is also a new reference idea.On the premise of clarifying the criteria of good faith,this article examines the allocation of liability between companies and their legal representatives under ultra vires act.This article follows the viewpoint of the “reality theory”,which holds that the relationship between the legal representative and the legal person is essentially one of representation rather than agency,and therefore the relevant provisions on powerless agency cannot be applied by direct analogy.In the case of non-bona fide counterpart,the guarantee contract is not effective against the company,but it does not mean that the company does not have to bear any responsibility,in the legal representative’s ultra vires act constitutes the premise of the performance of duties,the company should bear what specific liability is closely related to the fault of the counterpart and the company.