preface

The Civil Code of the People's Republic of China (hereinafter referred to as the "Civil Code") came into force on January 1, 2021. In order to cooperate with the implementation of the Civil Code, the Supreme People's Court, on the basis of clearing up relevant judicial interpretations, combined with judicial practice, The Supreme People's Court's Interpretation on the Application of the Guarantee Part of the Civil Code of the People's Republic of China (hereinafter referred to as the "Judicial Interpretation of the Guarantee System of the Civil Code") has been formulated and implemented simultaneously with the Civil Code. "What is the impact of the Civil Code and the Judicial Interpretation of the Civil Code Guarantee System on the project guarantee measures of financial institutions? What are the key points of attention for financial institutions to pay when arranging and implementing project guarantee measures after the Civil Code? We have made relevant summaries for reference.".

1、 Guarantees provided by controlling subsidiaries of listed companies are subject to the requirements for guarantees provided by listed companies

According to the Judicial Interpretation of the Guarantee System of the Civil Code, when a listed company provides guarantees, financial institutions, as creditors, need to enter into a guarantee contract with the listed company based on the publicly disclosed information about the guarantee matters that have been approved by the board of directors or shareholders' meeting, and the guarantee contract party has effect on the listed company. The aforementioned requirements for the provision of guarantees by listed companies shall apply to the holding subsidiaries that have been publicly disclosed by listed companies.

As a creditor, financial institutions need to pay attention to checking whether the guarantee subject is a subsidiary controlled by a listed company. If it is a subsidiary controlled by a listed company, it is necessary to enter into a guarantee contract with the subsidiary controlled by the listed company based on the information publicly disclosed by the listed company regarding the guarantee matters of the subsidiary controlled by the listed company that have been resolved by the board of directors or the shareholders' meeting.

2、 The rules for determining the effectiveness of credit enhancement measures such as debt addition, margin replenishment, and liquidity support are the same as those for companies providing guarantees to others

According to the Judicial Interpretation of the Guarantee System of the Civil Code, similar commitment documents such as margin replenishment and liquidity support provided by a third party as a credit enhancement measure, with an indication of intention to provide guarantee, shall be handled in accordance with the relevant provisions of the guarantee. If there is an indication of intention to join the debt or jointly assume the debt with the debtor, it shall be treated as a debt addition. If it is difficult to determine whether it is a guarantee or a debt addition, it shall be recognized as a guarantee. If the legal representative joins the debt in the name of the company, the determination of the effectiveness of the act shall be handled with reference to the relevant rules on the company providing guarantees for others.

Previously, in order to circumvent the requirements of guarantor resolutions, information disclosure, and other measures, such as debt addition, margin replenishment, and liquidity support, were no longer feasible to replace guarantee arrangements.

3、 Creditors have a priority right of repayment for the funds in the margin account

According to the Judicial Interpretation of the Guarantee System of the Civil Code, the debtor or a third party establishes a special margin account to guarantee the performance of the debt and is under the actual control of the creditor, or deposits its funds into the margin account established by the creditor. The creditor has the priority right to receive compensation for the funds in the account.

Financing projects usually have a collection account/settlement account arrangement that requires the debtor or a third party to collect a certain proportion of funds to the collection account within a certain time before the financing expires, or requires the debtor or a third party to deposit the proceeds from the sale of the loan project/collateral project to the settlement account in a certain proportion, and agrees that the collected funds/settlement funds are only used to repay the debt, The collection account/sedimentation account is opened in the name of the debtor or a third person. Does the creditor have a priority right of repayment for the funds in the collection account/sedimentation account? According to the Judicial Interpretation of the Guarantee System of the Civil Code, it is recommended to implement the following measures:

1. The collection account/sedimentation account is a newly established account, and it is explicitly agreed that it is a special margin account established by the debtor or a third party to guarantee the performance of the debt;

2. The creditor shall implement effective regulatory measures for the account to ensure actual control of the account;

3. The funds in the account are not used for other purposes except for repaying debts.

4、 Failure of creditors to exercise their rights to all guarantors may result in the guarantor being exempted from warranty liability to a certain extent

According to the Judicial Interpretation of the Guarantee System of the Civil Code, there are two or more guarantors for the same debt, and the guarantors have the right of recourse against each other. If the creditor fails to exercise rights against some of the guarantors within the guarantee period according to law, resulting in other guarantors losing the right of recourse after assuming the guarantee liability, the other guarantors have the right to claim exemption from the guarantee liability to the extent that they cannot recover.

In a project with multiple guarantors, once the debtor fails to perform its obligations, the financial institution, as a creditor, should pay attention to exercising its rights to all guarantors during the guarantee period, to avoid claiming exemption from the guarantee liability to the extent that it cannot recover due to the loss of recourse rights caused by only exercising rights to some guarantors.

5、 Registration of security interests in the name of others does not affect the effectiveness of security interests

In addition to "the security interest provided to the bondholder is registered in the name of the bond trustee" and "the security interest provided to the entrusted lender is registered in the name of the trustee", there has been a dispute as to whether the security interest can be registered in the name of another person without being registered in the name of the creditor in other circumstances. The Judicial Interpretation of the Security System of the Civil Code clearly stipulates the third situation where the security interest is registered in the name of another person, namely, "other situations where the guarantor knows that there is a trust relationship between the creditor and the other person". In this situation, the registration of the security interest in the name of another person does not affect the effectiveness of the security interest.

In practice, due to the qualification requirements of some registration institutions for creditors, creditors need to seek a subject that meets the qualification requirements of the registration institution as a security interest holder and register the security interest in their name, which is commonly referred to as "holding on behalf of" the security interest. When the effectiveness of "holding on behalf of" the security interest is recognized, It is necessary to note that the relevant arrangements for "holding" the security interest should be clearly defined in a written agreement and signed by the guarantor as the main body of the agreement.

6、 Maximum amount of guarantee The maximum amount of creditor's rights should be maximized when registering

There has always been a dispute in practice as to whether the maximum amount of creditor's rights in the maximum amount guarantee refers to the "maximum amount of principal" or the "maximum amount of creditor's rights". This Judicial Interpretation of the Guarantee System of the Civil Code clarifies that the maximum amount refers to the total amount of creditor's rights, but allows the parties to agree otherwise. Although the parties may agree otherwise, if the registered maximum amount of creditor's rights is inconsistent with the maximum amount of creditor's rights agreed upon by the parties, the registered maximum amount of creditor's rights shall be used to determine the priority compensation scope.

If there is a maximum amount of guarantee in the project guarantee, the scope of the maximum amount of creditor's rights should be clearly agreed in the contract, and the maximum amount should be registered as much as possible during registration, in order to fully guarantee the realization of creditor's rights.

7、 Mortgage of construction in progress should be regularly updated

As for the mortgage of projects under construction, the Judicial Interpretation of the Guarantee System of the Civil Code clearly stipulates that the people's court shall not support the parties who claim the validity of the mortgage right to extend to the continued construction, new buildings, and buildings not yet constructed in the plan according to the provisions of the guarantee contract. Therefore, when it comes to mortgage guarantees for projects under construction, attention should be paid to timely handling the registration of collateral for new/continued construction based on the construction situation of the projects under construction.

(This article is translated by software translator for reference only.)