Discussion On Legal Validity Of External Guarantee By Company

The identification to legal validity of external guarantee by company is one of the most debated issues both in theory and practice. The legal force of the guarantee contract concluded by the company, the guaranteed party and the creditor affects the vital interests and the legal liabilities of the parties.Compared to the provisions to the guarantee in the <Company Law> of 1993, the provisions of the <Company Law> of 2005 are more rational and scientific, however, yet it is conflicted with the <Guarantee Law> and the <Contact Law>. Due to such conflicts, the courts in different places and even the individual judger of the same court would give total contrary judgments against the cases in the same nature.It can be seen from the Article 1 Provision 16 of the <Company Law> of 2005 that the company should provide the external guarantee only by the due process. It is no doublets that such provision is positive to encouraging the transitions and assuring the safety of business. The capability of providing guarantee of the company is confirmed by legislation, however, the validity is limited by the articles of incorporation, resolutions of the shareholder's party and the director's party and moreover in practice, most companies are not able to learn the full importance of the articles of incorporation when first established, which causes such acts as the defect provisions in the articles of incorporation regarding the guarantee and the wrong doing from the body of decision-making and the unauthorized guarantee from the directors and the manager. Regarding the issues of the guarantee contract identification those are caused by those non-normative acts, the <Company Law> of 2005 keeps silent.From the issues of the capability of providing guarantee by the company, this paper firstly confirms the capability of providing guarantee by the company and then analyses that the source of the conflicts of the rules to the guarantee by the company lies in that the individual law protects the interests of different parties. The company law protects the interests of the investors i.e. the shareholders, meanwhile, the <Guarantee Law> and the <Contact Law> focus on the interests of the creditors. On the same hand, this paper concerns the effect of the articles of incorporation of the company to the legal force of the guarantee and demonstrates and confirms the defence of the articles of incorporation against the third parties in certain cases.The different forms and administration structures of the company significantly affect the legal force of the guarantee contracts. This paper analyses both the human joining nature of the limited liabilities companies and the capital joining nature of the share limited companies, especially the public listed companies. Hereafter, based on the variety of the company forms, this paper analyses the identification to common issues of the validity of guarantee in details.In a limited liability company, the ownership and management of the company are inseparable which means the shareholders of the company both afford the risks of the investments and participate in the management of the company. The shareholders are the positive decision makers of the major business issues of the company and even in very rare cases that absent from making the decisions, the shareholders by trust authorize other shareholders or other management institutions to make the decision. Therefore, in the case of the defect of the guarantee, it should be taken in to account that the liabilities of the shareholders are generated by trust and in terms of identification of the validity of the guarantee, the creditor's interests shall be protected.In a share limited company especially a public listed company, the shareholder qualification is acquired by paying the share price and buying the shares, but not by the person relationship between the other shareholders. Due to the lack of corporation and trust, under the capital majority rules, the minority shareholders are in vulnerable position. Therefore, from the value protection point of view, the driving force of the boom and stability of the capital market to the general economy is far more important than the trade market. In terms of the defects of the guarantee, when the interests between the investors and creditors are in conflicts, in order to maintain the boom and stability of the capital market, the safety and confidence of investors shall be gained by increasing the risks of the transactions of the creditors, which means that the investor's and shareholder's interests shall be protected.During the course of debating the identification of the validity of the guarantee under the variety forms of companies, judging the validity of the guarantee contract should be mainly based on the abovementioned choices of interests protected.Eventually, this paper comments and advises on how to both improve the legal rules on guarantee and regulate the acts of guarantee in both theory and practice.