From the perspective of the Civil Code: How to determine whether the third party's declaration of intent is a guarantee or a debt addition?

Editor's Note

 

For a long time, in academic and judicial practice, debt accession has not been considered a new legal concept, but before the promulgation of the Civil Code, China's laws did not explicitly provide for debt accession. The functional similarities between debt addition and guarantee, as well as the inconsistent criteria for judgment and adjudication of debt addition in academic and judicial practice, can easily lead to confusion between the two. Article 552 of the Civil Code clearly introduces the concept of "joining debt" for the first time, clarifying the connotation of debt joining. Article 36 of the Supreme People's Court's Interpretation on the Application of the Civil Code of the People's Republic of China on the Guarantee System (hereinafter referred to as the "Interpretation of the Civil Code on the Guarantee System") stipulates the guiding principles for identifying guarantees and debt joining in judicial practice. The introduction of the above legal provisions provides a legal basis for the debt accession system and also guides the practice of debt accession trials. So, from the perspective of the Civil Code, how to determine whether the expression of intent of a third party is a guarantee or a debt accession? The following will attempt to analyze and answer the above questions through relevant cases.

According to Article 552 of the Civil Code, debt accession means that the debtor does not depart from the original contractual relationship, and a third party joins the debt relationship to jointly perform the debt with the debtor to the creditor. "If the third party and the debtor agree to join the debt and notify the creditor, or the third party expresses its willingness to join the debt to the creditor, but the creditor fails to explicitly refuse within a reasonable period of time, the creditor may request the third party to assume joint and several debts with the debtor within the scope of the debt that it is willing to assume.". Accordingly, debt accession requires an expression of intention to join or jointly assume debt.

 

According to Article 36 of the "Interpretation of the Guarantee System of the Civil Code", if the commitment document provided by a third party to the creditor has the intention to join the debt or jointly assume the debt with the debtor, the people's court shall recognize it as a debt joining as stipulated in Article 552 of the Civil Code. "If it is difficult to determine whether the commitment document provided by a third party is a guarantee or a debt addition, the people's court shall recognize it as a guarantee.". That is, doubt should be presumed as a warranty.

 

[Case 1] Reexamination of Contract Dispute between Yunnan Yuanteng Investment (Group) Co., Ltd. and Neijiang Yuancheng Real Estate Co., Ltd. [Case No.: (2020) No. 1021, Supreme Law and People's Republic of China, Judgment Date: March 26, 2020]

 

[Summary of Case]

 

1、 On January 16, 2011, Yuanteng Group (Party A) and Fu Jianhua (Party B) signed the "Investment and Equity Agreement", stipulating that:

 

（1） Both parties plan to inject capital to establish a new company (i.e., Yuancheng Company), with Party A investing 450 million yuan and holding 90% of the shares; Party B shall invest 50 million yuan and hold 10% of the shares. Party B's contribution shall be paid in cash in advance by Party A.

 

（2） Both parties agree that Party B shall be responsible for completing the acquisition of all assets of Aetna in the name of Yuancheng Company. After Party B completes the acquisition in the above lump sum manner, Party B will not return the investment of 50 million yuan advanced by Party A on behalf of Party B.

 

（3） Within five days after the signing of the agreement, Party A shall pay Party B 5 million yuan of the start-up fee for the acquisition of assets. Before March 31, 2011, Party A shall be responsible for paying another 10 million yuan of the lump sum fee to Party B. The remaining lump sum fee shall be fully paid to Party B according to the time required by the auction confirmation letter obtained by Yuancheng Company.

 

2、 On April 15, 2011, Yuanteng Group (Party A) and Fu Jianhua (Party B) signed a Supplementary Agreement, stipulating that the lump sum fee agreed to be paid to Party B in the Investment and Share Purchase Agreement shall be paid by Yuancheng Company within 60 days after Yuancheng Company and the bankruptcy administrator of Aetna Company sign the Bankruptcy Property Purchase and Sale Contract. If the payment is not completed within 60 days, Party A shall be responsible for the payment on behalf of Yuancheng Company.

 

3、 On July 22, 2015, Yuanteng Group signed a reconciliation confirmation letter with Fu Jianhua, specifying that among the lump sum expenses that Yuancheng Company should pay to Fu Jianhua due to the acquisition of Antai Company's assets, Yuanteng Group believed that two transactions of five million yuan had been paid, and could not provide a basis for payment.

 

4、 Fu Jianhua filed a lawsuit with the Neijiang Intermediate People's Court, requesting Yuanteng Group and Yuancheng Company to immediately pay Fu Jianhua the delayed asset acquisition lump sum fee of 30.13 million yuan and interest.

 

5、 The Neijiang Intermediate People's Court issued a civil judgment of first instance (2017) Chuan 10 Min Chu No. 34, which sentenced Yuancheng Company and Yuanteng Group to pay a lump sum fee of 26.13 million yuan and interest to Fu Jianhua.

 

6、 Yuanteng Group and Yuancheng Company refused to accept the first instance judgment of Neijiang Intermediate Court and filed an appeal to the Sichuan High Court. Sichuan High Court issued (2019) CMZ No. 789 civil judgment of second instance, annulling the judgment of Neijiang Intermediate Court of First Instance; Yuancheng Company and Yuanteng Group paid Fu Jianhua a lump sum fee balance of 24.73 million yuan and interest.

 

7、 Yuanteng Group and Yuancheng Company refused to accept the second instance judgment of Sichuan High Court and applied to the Supreme Court for retrial. The Supreme Court held that the second instance decision of the Sichuan High Court clearly identified the facts, correctly applied the law, and should be upheld in accordance with the law. It ruled to reject the retrial application of Yuanteng Group and Yuancheng Company.

 

[The court held that]

 

Regarding the issue of Yuanteng Group's joint liability or general guarantee liability for the debts involved in the case, the Supreme Court held that:

 

In this case, Yuanteng Group advocates that it should assume general guarantee responsibility for the debts involved in the case, rather than adding the debts identified in the original trial. In this regard, it should be determined based on relevant facts such as the agreement between the two parties, the actual performance of the contract, and the contractual interests of Yuanteng Group.

 

According to the content of the agreement between the two parties, Article 5 of the "Investment and Share Purchase Agreement" stipulates that "within five days after the signing of this agreement, Party A (referring to Yuanteng Group) shall pay Party B (referring to Fu Jianhua) 5 million yuan in the start-up fee for the acquisition of assets, and the remaining lump sum fees shall be fully paid to Party B according to the time required by the auction confirmation letter obtained by the new company.". According to the agreement, Yuanteng Group invested with Fu Jianhua to establish a new company for the purpose of acquiring the assets of Antai Company. Yuanteng Group is in a controlling position, and Fu Jianhua's contribution will be advanced by Yuanteng Group. After completing the acquisition of the assets of Antai Company, Fu Jianhua will not be returned as compensation for the completion of the acquisition work by Yuanteng Group to Fu Jianhua. The lump sum fee was provided by Yuanteng Group for Fu Jianhua to complete the acquisition of Aetna's assets in the name of Yuancheng Company, thereby confirming that the debt involved in the case was formed before the establishment of Yuancheng Company; From the perspective of performance, according to the payment vouchers submitted by Yuanteng Group in the first instance and the facts identified in the second instance, most of the lump sum fees paid were paid by Yuanteng Group, while a small portion were paid by Yuancheng Company, without distinguishing the order of performance, which does not meet the subordinate and supplementary characteristics of general guarantees; In addition, in the "Reconciliation Confirmation" signed by Yuanteng Group and Fu Jianhua, Yuanteng Group believed that two transactions of RMB 5 million had been paid, but it was unable to provide a basis for payment, indicating that it also did not deny that it still had a payment obligation for the debt involved in the case. In summary, Yuanteng Group neither explicitly stated in the agreement its intention to assume general suretyship responsibility for the debts involved in the case as a guarantor, nor jointly performed with Yuancheng Company. Its reason for asserting that the debts involved in the case are general guarantors cannot be established. In the original trial, it was determined that Yuanteng Group, as the subject of joint liability, was not inappropriate to assume joint liability with Yuancheng Company for the debts involved in the case.

 

[Case 2] The second instance of the loan contract dispute between Jiangsu Jintao Investment Holding Co., Ltd. and Jiangxi Kete Investment Co., Ltd. [Case No.: (2020) No. 295, Supreme Law and People's Court, judgment date: February 23, 2021]

 

[Summary of Case]

 

1、 On May 13, 2018, Kete Company, as Party A (the lender of funds), signed a "Loan Contract" with Party B Yizhou Company (the borrower), Party C (the account lender), Wan Xianliang, Yuan Xingxing, and Tu Mingming, agreeing that Kete Company would lend RMB 200 million to Yizhou Company for securities investment, with an annual interest rate of 16%, and pay quarterly. The cooperation period is 12 months, from May 14, 2018 to May 13, 2019.

 

2、 On May 13, 2018, Kete Company (Party A), Jintao Company, and Zhu Yongning (Party B) respectively signed the "Difference Replenishment Agreement", stipulating that Party B will unconditionally perform the obligation of making up the difference between fixed income and principal obtained by Kete Company under the "Loan Contract", and assume unlimited joint and several liability for this. That is, Party B unconditionally and irrevocably undertakes that, within the cooperation period specified in the loan contract, if Party A fails to obtain the loan proceeds as agreed in the agreement, Party B shall, in accordance with relevant agreements, transfer funds in cash to the account designated by Party A to make up the difference.

 

3、 Kete Company sued the Jiangxi High Court and requested Yizhou Company, Jintao Company, and Zhu Yongning to repay the loan of over 272.64 million yuan and interest to Kete Company.

 

4、 The court of the Jiangxi High Court issued the (2019) GMC No. 64 civil judgment of first instance, ruling that (1) Yizhou Company shall repay the loan of RMB 200 million and interest of Kete Company; （2） Yizhou Company repaid over 72.64 million yuan to Kete Company for covering losses; （3） Jintao Company and Zhu Yongning shall be jointly and severally liable for the payment obligations of Yizhou Company under items (1) and (2).

 

5、 Jintao Company refused to accept the first instance judgment of Jiangxi High Court and filed an appeal to the Supreme Court. The Supreme Court made the following judgment (2020): (1) Revoking the first instance judgment of the Jiangxi High Court; （2） Yizhou Company repaid the loan principal of 200 million yuan and interest to Kete Company; （3） Jintao Company and Zhu Yongning shall be jointly and severally liable for the payment obligations of Yizhou Company in Item 2 of this judgment.

 

[The court held that]

 

On the nature and effectiveness of the "Difference Makeup Agreement".

 

Jiangxi High Court believes that:

 

The main content of the "Difference Makeup Agreement" is the agreement between the parties on debt assumption, which is the true expression of the parties' intentions. The content does not violate the mandatory provisions of laws and administrative regulations, and is legal and effective. The "Difference Replenishment Agreement" stipulates that Jintao Company and Zhu Yongning shall unconditionally perform the obligation of making up the difference between the fixed income and principal obtained by Kete Company that may arise under the "Loan Contract", and Jintao Company and Zhu Yongning shall bear unlimited joint and several liability for the above obligations. It can be seen that Jintao Company and Zhu Yongning voluntarily joined in fulfilling the obligations of the borrower under the Loan Contract to ensure the realization of the lender's creditor's rights. The "Difference Replenishment Agreement" is related to the rights and obligations of the "Loan Contract" and has the nature of debt addition. Jintao Company and Zhu Yongning shall bear unlimited joint and several liabilities for the obligations of Yizhou Company in the "Loan Contract" in accordance with the "Difference Replenishment Agreement". Jintao Company and Zhu Yongning believe that the claim that the "Difference Replenishment Agreement" is not established and invalid cannot be established. They believe that the difference replenishment obligation belongs to a general warranty liability, while the defense of non joint and several warranty liability lacks factual and legal basis, and they do not support it.

 

The Supreme Court held that:

 

According to the "Difference Replenishment Agreement", Jintao Company and Zhu Yongning have fully understood all their obligations and risks under the "Loan Contract" involved in the case, and promise to unconditionally perform the difference replenishment obligations of fixed income and principal obtained by Kete Company under the "Loan Contract", and Jintao Company and Zhu Yongning shall bear unlimited joint and several liability for the above obligations. The "Difference Replenishment Agreement" does not explicitly stipulate that Jintao Company and Zhu Yongning provide guarantee for the debts of Yizhou Company under the "Loan Contract", and from the perspective of the "Difference Replenishment Agreement", the difference replenishment obligation of the difference replenishment person does not have a debt dependency, and the first instance judgment determines that Jintao Company and Zhu Yongning belong to the debt addition, and there is no improper. The claim of Jintao Company that its provision in the "Difference Replenishment Agreement" is only a general warranty liability, lacking factual and legal basis, and the Court does not support it. Zhu Yongning is a 90% shareholder of Jintao Company, and as the legal representative and major shareholder of Jintao Company, he signed the "Difference Replenishment Agreement" on behalf of Jintao Company to confirm that his intention to join the debt is legal and valid.

 

[Case 3] Second instance case of contract dispute between Beijing Tairong Investment Co., Ltd. and You Yulan [Case No.: (2021) Jing 03 Min Zhong 7371, judgment date: May 11, 2021]

 

[Summary of Case]

 

1、 On September 29, 2011, Chengdu Zhaorui Company (Party A) signed an Investment Cooperation Agreement with Beijing Tairong Company (Party C) and Guangxi Yongli Company (Party B). According to the agreement, according to the progress and proportion of the registered capital, Party A agrees to lend 2.5 million yuan to Party B in installments and proportions for the purpose of Party B's contribution. In order to ensure the normal arrangement of the exploration and production schedule, Party A borrows an advance fee of no more than 2 million yuan to Party B.

 

2、 On July 3, 2012, Beijing Tairong Company (Party A) signed a Share Holding Agreement with Chengdu Zhaorui Company (Party B) and Guangxi Yongli Company (Party C). The agreement stipulates that the 2 million yuan and other related expenses lent by Party B to Party A are converted into 3% of the shares of Beijing Tairong Company, and Party B entrusts the legal representative of Party A, You Yulan, to hold the above shares on its behalf, You Yulan shall exercise all shareholder rights of Party B in her own name. Beijing Tairong Company promises to transfer 100% of the assets of Guangxi Yongli Company at a price of no less than 150 million yuan. After completing the transfer of Party C, Party A shall transfer the share rights and interests that Party B shall enjoy to Party B.

 

3、 On October 26, 2018, You Yulan and Beijing Tairong Company issued a Statement to Chengdu Zhaorui Company, stating that due to the change of the legal representative of Beijing Tairong Company from You Yulan to Xia Zhongxin on May 31, 2018, it is hereby declared that You Yulan recognizes the Equity Holding Agreement, and that the change of the legal representative of Beijing Tairong Company will not affect the obligations of You Yulan in the agreement; As the controlling majority shareholder of the company, I personally undertake to assume all responsibilities for the obligations stipulated in this agreement.

 

4、 Chengdu Zhaorui Company filed a lawsuit with the court of first instance requesting that: (1) Beijing Tairong Company be ordered to pay 4.5 million yuan for the share equity; （2） Order Beijing Tairong Company to pay liquidated damages; （3） Yu Yulan was ordered to bear joint and several liability for the above expenses.

 

5、 The court of first instance made a judgment in December 2020: (1) Beijing Tairong Company paid 4.5 million yuan for the equity of shares to Chengdu Zhaorui Company; （2） Beijing Tairong Company pays liquidated damages to Chengdu Zhaorui Company; （3） Reject other litigation claims of Chengdu Zhaorui Company.

 

6、 Chengdu Zhaorui Company and Beijing Tairong Company refused to accept the first instance judgment of Beijing Chaoyang Court and filed an appeal to the Beijing Third Intermediate Court. The Beijing Third Intermediate People's Court issued a final judgment (2021) J03Minzhong No. 7371, rejecting the appeal and upholding the original judgment.

 

[The court held that]

 

Regarding whether You Yulan constitutes a debt addition.

 

The Beijing Chaoyang Court held that:

 

According to the Statement issued by You Yulan on October 26, 2018, Chengdu Zhaorui Company claims that You Yulan shall bear joint liability. The court of first instance held that the statement "as the controlling majority shareholder of the company, I also undertake to assume all responsibilities for the obligations stipulated in the Share Holding Agreement" only indicates that You Yulan undertakes to fulfill the obligations under the Share Holding Agreement, namely, "hold the shares in subrogation", "You Yulan exercises all shareholder rights of Chengdu Zhaorui Company in her own name", and other obligations, There is no intention of assuming joint and several liability for the debts of Beijing Tairong Company. Chengdu Zhaorui Company hereby claims that You Yulan is jointly and severally liable for the debts involved in the case, lacking contract and legal basis, which is difficult for the court of first instance to support.

 

Beijing Third Intermediate School believes that:

 

Debt accession means that the debtor does not depart from the original contractual relationship, and a third party joins the debt relationship to jointly perform the debt with the debtor to the creditor. "If the third party and the debtor agree to join the debt and notify the creditor, or the third party expresses its willingness to join the debt to the creditor, but the creditor fails to explicitly refuse within a reasonable period of time, the creditor may request the third party to assume joint and several debts with the debtor within the scope of the debt that it is willing to assume.". In this case, according to the statement issued by You Yulan, "As the controlling majority shareholder of the company, I also promise to assume full responsibility for the obligations stipulated in the Share Holding Agreement." The obligations under the Share Holding Agreement are "holding shares in subrogation", and You Yulan exercises all shareholder rights of Chengdu Zhaorui Company in her own name. ". Therefore, the "Statement" cannot naturally deduce that You Yulan joined the debt and jointly paid the share equity payment to Chengdu Zhaorui Company with Beijing Tairong Company. The court of first instance determined that this was correct, and this court confirmed it.

 

[Case Analysis]

 

In the above three cases, the judgment time of Case 1 is before the entry into force of the Civil Code, and the judgment time of Case 2 and Case 3 is after the entry into force of the Civil Code. However, the judgment time of Case 1 is relatively close to the effective date of the Civil Code, so the reasoning part of its judgment also has reference significance.

 

According to the provisions of the Civil Code, a guarantee contract refers to a contract whereby, in order to guarantee the realization of a creditor's right, the guarantor and the creditor agree that when the debtor fails to perform the due debt or circumstances agreed upon by the parties occur, the guarantor performs the debt or assumes responsibility; Debt participation refers to the participation of a third party in the debt and the joint and several obligations owed to the creditor together with the original debtor without the explicit refusal of the creditor. Through the analysis of these three cases, it can be seen that in judicial practice, it is mainly from the following points to identify whether the expression or commitment of the third party belongs to a guarantee or a debt addition:

 

First, identifying guarantees and debt additions should first be qualitative based on clear wording in relevant agreements or commitment documents. However, in cases where relevant documents do not explicitly use relevant terminology or the terminology used conflicts with the true meaning expressed in the document Factors such as the relationship between the parties and the actual performance of the contract comprehensively determine whether the document conforms to the essential characteristics of the debt accession system or the guarantee system Whether it is a guarantee or a debt addition, a clear expression of intent is required. In particular, debt accession, because its liability is heavier than guarantee, requires a clear expression of intent to join in debt, jointly assume responsibility, or assume joint and several liability, and cannot be arbitrarily presumed.

 

Secondly, a subordinate expression of intent is more likely to be identified as a guarantee; An expression of intent that is independent or identical to the original debt is more likely to be recognized as a debt addition. Whether it is a general guarantee or a joint and several liability guarantee, compared to the main debt, it has a subordinate attribute. The essential characteristics of debt addition are independence, coexistence, and identity with the original debt. For example, in Case 1 and Case 2, the Supreme Court recognized the declaration or commitment made in the relevant documents as a debt addition because they were not subordinate or complementary.

 

Thirdly, for general guarantees, they are also complementary and sequential. For example, in Case 1, the Supreme Court held that the majority of the lump sum fees paid were paid by Yuanteng Group and a small portion were paid by Yuancheng Company, without distinguishing the order of performance, which did not comply with the subordinate and supplementary characteristics of general guarantees. Therefore, the Supreme Court held that Yuanteng Group should be the subject of joint responsibility.

 

Fourth, the actual performance of the contract and the standards of interest. In Case 1, in addition to considering the subordination and complementarity of guarantees, the Supreme Court also considered factors such as the actual performance of the contract and the ownership of interests after the performance of the contract, in determining whether the relevant expression of intent is a guarantee or a debt addition. If a third party and the debtor jointly perform the relevant debt, and after the debt is performed, the third party can directly or actually enjoy the benefits of debt performance, then the expression of intention is more likely to be recognized as a debt addition.

 

Fifth, according to Article 36, paragraph 3, of the Interpretation of the Guarantee System of the Civil Code, "If it is difficult to determine whether the commitment document provided by a third party in the first two paragraphs is a guarantee or a debt addition, the people's court should recognize it as a guarantee." This will change the practice of "presuming debt addition in case of doubt" before the Civil Code and the Interpretation of the Guarantee System of the Civil Code came into effect, Instead, the identification principle of "presumption of doubt as assurance" was clarified. The judgment result of Case 3 follows this principle, which more reasonably and fairly protects the legitimate rights and interests of all parties.

 

[Practical Summary]

 

In summary, for a guarantor or debt participant, the general guarantee liability is the lightest, followed by joint and several liability guarantees, and the debt participant is the heaviest. On the contrary, for creditors, debt participation is the most advantageous, followed by joint and several liability guarantees, and general guarantees are relatively the most unfavorable. It can be said that both guarantee and debt addition have certain functions to ensure the realization of creditor's rights, but their respective roles and effects differ greatly. After the promulgation of the Civil Code and the Interpretation of the Civil Code Guarantee System, the legal definitions of guarantee and debt accession have become clearer and more rule-based. Therefore, whether it is a guarantor, debt participant, or creditor, when signing a relevant agreement or commitment document, it is necessary to standardize relevant legal terminology or terminology, clearly express their true meaning, clearly and accurately receive the true meaning of the other party, while using the guarantee system or debt participation system to achieve their respective goals, to avoid confusion between guarantee and debt participation, and to prevent disputes or lawsuits.

 

① See Gao Shengping, "Understanding and Application of the Civil Code Guarantee System and Its Supporting Judicial Interpretation," China Legal Publishing House, March 2021, first edition, page 91.

 

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