Document No.29 and the validity of cross-border guarantees

Authors: Zhang Guanglei / Cui Jiaqi

(This article was first published on China Business Law Journal column "Cross-border dispute resolution", authorised reprint)

Cross-border guarantees commonly exist in cross-border transactions. It means a guarantee provided by the guarantor to the creditor, promising to fulfil the relevant payment obligation, which may give rise to such international balance of payments as cross-border receipts and payments, or the cross-border assignment of the ownership of assets, which include onshore guarantees for offshore loans, offshore guarantees for onshore loans, and other forms of cross-border guarantees.

According to the relevant regulations on China’s foreign exchange administration, cross-border guarantees shall be registered. As a mandatory requirement, whether registration would impact the validity of a cross-border guarantee contract is a controversial issue in judicial practice. With the implementation of the Provisions on the Foreign Exchange Administration of Cross-border Guarantees, issued by the State Administration of Foreign Exchange (SAFE) and promulgated by document No. 29, the attitude of judicial practice towards this issue has gradually become clearer, but there remain uncertainties.

Before document No. 29 came into effect, unregistered cross-border guarantee contracts were determined as invalid in most cases. The Regulations on the Management of Foreign Exchanges, effective from January 1996, provides that a foreign guarantee needs to be approved by the foreign exchange management administration. In September 1996, the Procedures for the Administration of Guarantees Overseas By Institutions Within the Chinese Territory, article 17, provides that, “an oversea guarantee contract shall be invalid if the guarantor is not approved to issue overseas guarantees”.

In September 2000, the Judicial Interpretation Regarding Security Law, article 6, provides that unapproved or unregistered cross-border security guarantee contracts shall be invalid. Thereafter, article 6 became the adjudication basis in judicial practice to determine the validity of unregistered cross-border guarantee contracts. For example, in Case (2010) Min Si Zhong No. 12 and Case (2002) Hu Gao Min Er Shang Zhong No. 135, both courts determined that the unregistered cross-border guarantee contracts were invalid according to this article.

After document No. 29 came into effect, unregistered cross-border guarantee contracts have been determined as valid in most cases.

Article 29 of document No. 29 provides that: “The approval, registration or filing granted by the foreign exchange authority to a cross-border guarantee contract, or any other management matter or requirement as specified by these provisions, does not constitute an essential element for the effectiveness of the contract.” On 8 June 2014, the Procedures for the Administration of Guarantees Overseas By Institutions Within the Chinese Territory, issued by People’s Bank of China, terminated.

Although document No. 29, as an important departmental regulatory document, is not law or administrative regulation in nature, it has brought a substantial impact on judicial adjudication. After document No. 29 came into effect, unregistered cross-border guarantee contracts have been determined as valid in most cases. For example, in Case (2016) Yue 01 Min Zhong No. 7938, Case (2017) Zhe Min Zhong No. 716 and Case (2018) Zui Gao Fa Min Shen No. 2739, courts have determined that unregistered cross-border guarantee contracts are still valid.

Courts held that although article 6 of the Security Law remains effective, since the relevant state foreign exchange administration authority has decoupled the administrative requirements of approval, registration for cross-border guarantee, etc., from the determination of the validity of guarantee contract, article 6 of the Judicial Interpretation Regarding the Guarantee Law is no longer an applicable legal basis.

In addition, as to whether document No. 29 could apply to the determination of cross-border guarantee contracts signed before its coming into effect, the Supreme Court of Guangdong Province has made an affirmative response in Case (2019) Yue Min Zhong No. 979. The court held that the unregistered cross-border guarantee contract signed by the party before document No. 29 came into effect is valid. In the above-mentioned Case (2018) Zui Gao Fa Min Shen No. 2739, the court held the same affirmative opinion.

After document No. 29 came into effect, there are still some cases where unregistered cross-border guarantee contracts have been determined as invalid.

Due to the contradiction between article 29 of document No. 29 and article 6 of the Judicial Interpretation Regarding Security Law, as well as the fact that document No. 29 is merely a departmental regulatory document, in judicial practice some courts did not determine that unregistered cross-border guarantee contracts were valid based on document No. 29 alone.

For example, in Case (2016) Yue 03 Min Zai No. 36 and Case (2017) Xin Min Zhong No. 20, courts determined that cross-border guarantee contracts were invalid because they were not registered. In the two cases, courts held that, according to article 6 of the Judicial Interpretation Regarding Security Law, cross-border guarantee contracts shall be invalid if the guarantee is not approved or registered by the relevant state foreign exchange authority, and courts did not mention or refer to the provisions of document No. 29.

It can be seen from the above that, regarding the impact of registration on the validity of cross-border guarantee contracts, document No. 29 has played a decisive role. After it came into effect, many courts, including the Supreme Court, determined that unregistered cross-border guarantee contracts are valid.

However, there are still some courts that deny the validity of unregistered cross-border guarantee contracts, according to article 6 of the Judicial Interpretation Regarding Security Law. The authors opine that article 52(5) of the Contract Law provides that a contract shall be null and void if it violates the compulsory provisions of laws and administrative regulations, but in terms of legal hierarchy, document No. 29 is merely a departmental regulatory document, so the court has the right to review the validity of cross-border guarantee contracts without considering its provisions.

This issue remains to be further clarified by laws, administrative regulations or judicial interpretations in order to avoid different adjudication standards in judicial practice.

Special note

In conclusion, although document No. 29 has cut off the decisive relationship between registration and the validity of guarantee contracts, there is still risk in judicial practice that unregistered cross-border guarantee contracts may be determined as invalid. In the meanwhile, even if registration does not have any impact on the validity of contracts, if a cross-border guarantee arrangement is not registered, the parties also face the risk of administrative penalty, and the risk that the guarantee cannot be fulfilled.

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作者介绍张光磊

合伙人

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张光磊律师毕业于中国政法大学，获法学学士、民法学硕士和商法学博士学位。此外，获美国乔治华盛顿大学法学硕士学位，为哥伦比亚大学法学院访问学者。张律师拥有中国及美国纽约州律师资格，为香港国际仲裁中心在册仲裁员，中国政法大学法律硕士学院和对外经济贸易大学法学院兼职导师。

张律师的主要业务领域为争议解决，在民商事诉讼、仲裁、调解等领域拥有丰富的经验，被CLECSS评选为2018年十大杰出青年律师。在香港国际仲裁中心主办的2019国际仲裁中文赛中，张律师带领竞天公诚律师事务所获得北京赛区冠军和全国亚军，其个人在所有场次比赛中均被评为最佳律师。

张律师曾代表境内外客户处理过中国国际经济贸易仲裁委员会及其分会、北京仲裁委员会、上海国际仲裁中心、深圳国际仲裁院、珠海国际仲裁院、香港国际仲裁中心等仲裁机构及中国不同层级法院的数百宗民商事案件。张律师擅长在跨境交易纠纷中为客户制定整体解决方案，曾在美国、新加坡、香港等地的诉讼和仲裁程序中多次担任中国法顾问及专家证人。

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 崔嘉琪  

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崔嘉琪毕业于中国政法大学，获法学学士和法律硕士学位，专业领域为争议解决。

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