Must creditors review external guarantee disclosures?

Since the implementation of the Civil Code, a series of judicial interpretations have been issued to clarify the law’s implementation. One such document, the Interpretations of the Supreme People’s Court on Application of the Security System in the Civil Code, sheds light on creditors’ obligations regarding guarantee disclosures made by domestically listed companies.

Pro-forma review

Although neither the Minutes of the Ninth National Work Conference on Civil and Commercial Adjudication by Courts nor the Supreme People’s Court (SPC) interpretations provided a specific format for disclosure, creditors may refer to documents published by the Shanghai and Shenzhen stock exchanges – the former’s Memorandum on Routine Information Disclosure of Listed Companies and the latter’s Guidelines of the Shenzhen Stock Exchange on the Business Handling of Listed Companies for disclosure review.

Both of these documents are applicable to the disclosure by listed companies of information on their annual projections for guarantees provided and matters relating to the guarantees and counter-guarantees provided by listed companies and their controlled subsidiaries to related or other parties.

According to the Shanghai announcement, once the projected guarantee limit for a listed company has been announced, the actual amount of any provided guarantee within the limit must be disclosed on an ongoing basis. It is our understanding that even when a listed company opts for a centralised disclosure method and manages the debtors’ expression of guarantee limit, the creditor should nevertheless pay attention to whether the listed company has disclosed any specific guarantee during the period, as well as verify its percentage within the guarantee limit.

Substantive review

Under article 9 of the SPC’s interpretations, an external guarantee disclosure, serving as the basis for the performance of a guarantee contract, should fulfill the following conditions – it is publicly announced by the listed company, and the guarantee in question has been approved by the company’s board of directors or shareholders’ general meeting in the form of a resolution. Accordingly, a creditor should concentrate its review efforts along those lines.

Accepted public channels for lawful disclosure. In view of the constantly changing mediums and methods for information dissemination, article 86 of the new Securities Law (amended in 2019) revised the list of designated media for information disclosure under article 70 of the former Securities Law (amended in 2014).

This specifies that security exchange websites are statutory media for information disclosure; and switches from a list of “designated media” to any media satisfying the conditions provided by the China Securities Regulatory Commission (CSRC).

The information disclosure channels under the Administrative Measures for Information Disclosure by Listed Companies, issued on 18 March 2021, also maintain consistency with the new Securities Law, adopting the expression of “stock exchange websites” and “media satisfying the conditions provided by the CSRC”. They further specify that media releases or press conferences cannot be considered proper fulfillment of the disclosure and announcement obligations, and regular reporting cannot be used to substitute for required interim reporting.

Following the promulgation of the new Securities Law, the CSRC and the National Press and Publication Administration issued the List of Media Satisfying the Conditions for Securities Market Information Disclosure on 11 September 2020, expressly setting out the media permitted to engage in securities market information disclosure, namely the Financial Times, Economic Information Daily, China Daily, China Securities Journal, Securities Daily, Shanghai Securities Journal, Securities Times and their legally operated websites.

Before the issue of the list, the designated disclosure media for domestically listed companies to disclose their external guarantees would have generally referred to the so-called “seven newspapers and two journals”, as well as the five websites – Cninfo, www.cs.com.cn, www.cnstock.com, STCN and www.ccstock.cn. Since it came out, the list, which is published in real time by the CSRC, shall prevail.

Disclosable information. The scope of disclosure should at minimum include information on the guaranteed party, the creditor, the master debt, and the one-time and aggregate guarantee amount allocated to a particular guaranteed party.

General meeting or board resolution. Based on the interpretations, if the provision of guarantee had not been approved by the board of directors or the general meeting in the form of a resolution, and the disclosure did not cover such prior approval, in other words there is only the listed company’s own announcement disclosing the provision of guarantee for a certain debt, the guarantee is most likely not valid for the listed company.

At first glance within the Civil Code, while it might seem that a guarantee contract between a creditor and a domestically listed company only requires due performance of the disclosure obligation to enter into effect, the authors nonetheless advise creditors to carefully review any external guarantee disclosure made by a domestically listed company, including verifying the media, the scope of disclosure of the provided guarantee, and whether a valid resolution has been approved by the general meeting or the board of directors.

On these grounds, the Hangzhou Intermediate People’s Court rendered its judgment at first instance in the dispute of Zhejiang Wuchan Yuantong Pawn v Zhejiang Dongyang Third Construction Engineering and Guangsha Holdings Group (2020), ruling that Yuantong Pawn failed to perform its basic review obligation. Accordingly, the maximum guarantee contract in the case was not effective for Guangsha Holdings, which consequently was not liable for any guarantee or damages.

On the other hand, disclosure for unconventional guarantees remains a pending issue, waiting to be clarified by future judgments.

Yao Xiaomin is a partner and Xue Yuan is an associate at Lantai Partners