The Decision Making on Corporate Guarantee Cases in Chinese Courts

Guarantees provided by companies play a crucial role in securing finance for small ormedium sized businesses in China. Under PRC Company Law Article 16, a company’sdecision to act as a guarantor must be authorized by either the directors or theshareholders’ meeting, depending on whether the borrower is a shareholder/controller ora company outsider. A PRC company must act through its ‘Legal Representative’ (LR).This latter requirement is subject to abuse by those professing to act as the company’sLR to obtain loans for themselves or others by proffering the company as a guarantorwithout the latter’s authorisation.How to allocate risks of corporate guarantee contracts? This issue is vexed because rulesgoverning the validity of corporate (guarantee) contracts and parties’ liability thereunderare either incomplete or biased against the (alleged) guarantor. The challenge for courtsis how to balance the need for protecting contractors/lenders and that for safeguardingthe interests of the company’s shareholders and creditors.Our pilot project based on the Supreme People’s Court (SPC) and High People’s Court(HPC) decisions of Article 16 cases listed in an authoritative database reveals that courtsusually hold the alleged guarantor wholly or partially liable, irrespective of the court’sown decision on the validity of the alleged guarantee contract. This trend signifies afailure in maintaining an even hand between the two conflicting interests. Such a failuremay incentivize fraud against the shareholders and creditors of the company, therebydiscouraging investments.This Project will review all accessible Article 16 decisions since the enactment of thatprovision in 2005 to complete the picture on the ways in which risks associated withcorporate guarantee have been allocated and factors that have contributed to theformation of the patterns of judicial decision-making. The Project also proposes toconduct semi-structured interviews with judges and other legal/commercialprofessionals to obtain information that case reports do not provide, such as the reasonswhy courts adjudicate in a given pattern where no guiding principles/rules exist or whyjudges fail to adjudicate according to existing rules. The Project will result in empiricaldata necessary for verifying claims on Article 16 adjudication made in the literature andfor reforming the law on corporate guarantee contracts, and corporate contractinggenerally.