Typical cases of the Guarantee Law

Author: Zhang Junyan
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Publishing Date: 2003-11-01
Features: Case Study 2: The Loan Guarantee Contract Dispute Case between the Wuyue Branch of the Bank of Communications and Wuyue Food and Grain Corporation et al. [Case Brief] On February 1, 1995, Wuyue Food and Grain Corporation applied to the Wuyue Branch of the Bank of Communications (hereinafter referred to as the Wuyue Branch) for a working capital loan of 300,000 yuan. The company was a regular customer of Wuyue Tiejing Subsidized Food Store (hereinafter referred to as Tiejing Store). The two parties frequently had business dealings. Tiejing Store, after being reviewed and approved by the Wuyue Branch, voluntarily provided a joint and several liability guarantee for the Food and Grain Corporation. After the contract was signed, the Wuyue Branch disbursed a 300,000 yuan loan with a term of three months. On April 20, 1995, the Food and Grain Corporation applied to the Wuyue Branch for a two-month extension of the loan repayment. The branch noted on the original loan contract that the extension was approved. Two months later, due to poor management and excessive inventory accumulation, the Food and Grain Corporation was unable to repay the loan. The Wuyue Branch then sued the People's Court, claiming that Tiejing Store, as the joint and several liability guarantor of the loan contract, should jointly bear the repayment responsibility with the Food and Grain Corporation. During the trial, Tiejing Store discovered that the Food and Grain Corporation and the Wuyue Branch had reached an agreement on the extension of the loan repayment, and the branch had only filed the lawsuit after the extension period expired. Tiejing Store refused to assume the guarantee liability. The Wuyue Branch claimed that the extension had been agreed upon by the store manager via phone, but had no evidence to support this. Additionally, the court found that Tiejing Store was a subsidiary of Tiejing Commercial Development Company, holding a business license but lacking legal person status, essentially being a branch of Tiejing Commercial Development Company.
Legal Issue (1) If an enterprise branch without legal person status serves as a guarantor, is the guarantee contract valid? (2) If the parties to the loan contract reach an agreement on extending the repayment period without the guarantor's consent, does the guarantor still bear the guarantee liability?
Legal Basis The PRC Guarantee Law came into effect on October 1, 1995. The case occurred during [Legal and Factual Analysis] Since Tiejing Store was merely a branch of a legal person and lacked legal person status, the primary issue in this case concerns the subject qualification of the guarantor, i.e., what qualifications a guarantor must have to provide a valid guarantee. This is the basic requirement of the law for parties acting as guarantors. Additionally, since the parties to the loan contract altered the repayment period, the case also involves the impact of the modification of the principal contract on the guarantee liability. In such circumstances, whether the guarantor needs to bear the guarantee liability depends on the specific situation. According to the above judicial interpretation, the handling opinions during the trial process were generally consistent. First, Tiejing Store lacked legal person status, and the guarantee contract it signed with the Wuyue Branch was invalid. Additionally, since the Food and Grain Corporation and the Wuyue Branch reached an agreement on the extension of the repayment period without the guarantor's consent, Tiejing Store was not liable. Of course, according to the provisions on the guarantee period in the Judicial Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the PRC Guarantee Law, issued on December 13, 2000, the guarantor should still bear appropriate civil liability in the above circumstances.
Existing Problems The case occurred before the implementation of the PRC Guarantee Law, primarily applying relevant judicial interpretations of the Supreme People's Court. However, whether it is the Guarantee Law or the judicial interpretations, the provisions regarding the issues involved in this case are consistent. The essence of guarantee is human security, ensuring the realization of claims through the creditworthiness of the guarantor. Therefore, the repayment ability and performance capacity of the guarantor are key to determining whether the claim can be realized. Thus, in the field of guarantee, attention must be paid to the subject qualification of the guarantor. The PRC Guarantee Law, in an enumeration manner, stipulates prohibitions and restrictive clauses in Articles 8, 9, and 10, prohibiting or restricting certain entities from serving as guarantors, including unauthorized branches of corporate legal persons, which are prohibited from acting as guarantors. So, how was the law stipulated before the implementation of the PRC Guarantee Law? An enterprise branch is an operating unit established by a corporate legal person, approved by the competent authority, holding a business license, and engaging in business activities within the approved scope, but it cannot independently bear civil liability. Examples include sub-factories, sub-stores, bank branches, insurance subsidiaries, etc. Regardless of the scale of the branch's operations, it is an integral part of the legal person and lacks complete independence. It does not have legal person status and can only operate to achieve the purpose of the affiliated legal person and within its business scope. The property it holds or uses does not belong to it but is part of the property of the affiliated legal person. The legal consequences of its business activities are borne by the affiliated legal person. Therefore, its business operations and other civil acts can only be carried out within the authorization of the legal person and cannot act on its own behalf. The issue involved in this case primarily concerns whether the guarantee provided by Tiejing Store, as a branch of Tiejing Commercial Development Company, is valid. Regarding this, the Supreme People's Court, in the Judicial Interpretation issued on March 24, 1988, on the issue of whether the guarantee provided by an enterprise branch without legal person status as a guarantor of an economic contract is valid and how disputes should be handled, stated: "(1) The guarantor of an economic contract should be a citizen, corporate legal person, or other economic organization with the ability to perform or compensate. If an enterprise branch lacks legal person status and the ability to perform or compensate while serving as a guarantor of an economic contract, the guarantee contract should be deemed invalid. (2) According to Article 61 of the General Principles of Civil Law, if the invalid guarantee act of the guarantor causes economic losses to the creditor of the economic contract, the guarantor should also bear corresponding compensation liability. (3) If an enterprise branch lacks the ability to perform or compensate, it should be listed as a party in the guarantee liability litigation and bear the civil liability that the guarantor should have borne." From the above interpretation, it can be seen that the law holds a negative attitude toward the legal status of an enterprise branch without legal person status serving as a guarantor. Accordingly, in this case, Tiejing Store, as a branch of a legal person, lacks the qualification to be a guarantor, and the guarantee contract it signed with the Wuyue Branch is an invalid contract. Moreover, in the litigation, Tiejing Commercial Development Company can be listed as a party in the lawsuit and bear corresponding liability. However, according to the above interpretation, if the invalid guarantee act of the guarantor causes economic losses to the creditor, the guarantor should also bear corresponding compensation liability. In this case, due to the poor management of the Food and Grain Corporation and its inability to repay the loan, significant economic losses were incurred by the creditor. Therefore, as the guarantor, Tiejing Store should be compensated. Of course, the compensation liability here should be determined based on the degree of fault of the guarantor, which is different from the guarantee liability stipulated in the contract.