Amid deepening global financial integration, Chinese corporations routinely secure financing through offshore syndicated loans and bond issuances, typically backed by outbound guarantees from domestic entities or individuals. However, when debtors face liquidity crises, foreign creditors confront complex challenges in enforcing these guarantees through China’s judicial system.
This article analyses a RMB2.8 billion (USD393.3 million, including default interest) cross-border guarantee dispute brought by an international bank (the agent bank) before a Chinese intermediate court, examining how foreign creditors can navigate mainland legal pathways to enforce claims while highlighting key practical obstacles and strategic considerations.
Context
Armstrong Chen
Senior Partner
Dacheng Law Offices
Tel: +86 139 1002 0938
E-mail: armstrong.chen@dentons.cn
The transaction structure in the dispute comprises three key components:
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- A syndicated loan facility, arranged by the agent bank co-ordinating multiple financial institutions, providing a USD165 million term loan to a special purpose vehicle incorporated in an offshore financial centre;
- Offshore notes issuance, with the agent bank acting as the security agent and notes trustee to facilitate the issuance of USD85 million in notes carrying a 7% coupon rate; and
- Credit enhancement measures, featuring joint liability guarantees from a domestically listed company and its ultimate controller, supported by share pledges over their equity interests in a premium Chinese commercial real estate developer, duly registered with the relevant market regulatory authorities in mainland China.
This cross-border guarantee facility, totalling USD250 million, was properly registered with the local branch of the State Administration of Foreign Exchange in accordance with the Provisions on the Foreign Exchange Administration of Cross-border Guarantees, ensuring full compliance with China’s foreign exchange regulations.
Domestic litigation strategies
Direct recourse. The creditor may choose to initiate legal proceedings against a guarantor within mainland China. This action is founded upon the right of direct recourse established by the “unconditional and irrevocable joint and several liability guarantee” clause within the guarantee agreement, coupled with the stipulation that “the creditor is entitled to seek repayment directly from the guarantor, who waives the right of defence of first recourse”.
Wang Xin
Associate
Dacheng Law Offices
Tel: +86 188 1783 7096
E-mail: wangxin.shanghai@dentons.cn
Supported by article 21 of the Interpretation of the Supreme People’s Court of the Application of the Relevant Guarantee System of the Civil Code of the People’s Republic of China, as well as article 41 of the Law of the People’s Republic of China on Choice of Law for Foreign-related Civil Relationships, the creditor is legally positioned to bring a direct claim against the guarantor in the domestic courts.
Jurisdictional split. When the main contract (the loan agreement) falls under foreign jurisdiction with its associated guarantee governed by Chinese courts, the creditor may file claims in a court with jurisdiction over the guarantor’s domicile, thereby approaching the debtor’s primary assets for simpler preservation and enforcement.
Despite the successful filing of the case in August 2021, asset preservation has proven difficult. The syndicate’s submission of asset information has been met with judicial caution as the court, mindful of a high volume of related cases and a drive for centralised control, has declined to implement the preservation ruling.
Overseas evidence admissibility and law applicability. Loan agreements and guarantees executed overseas need notarisation and legalisation. Article 16 of the Provisions of the Supreme People’s Court on Evidence in Civil Procedures stipulates that public documents formed outside China must be notarised by an authority in their country of origin, or authenticated pursuant to any applicable bilateral treaty with China.
Under article 39 of the Minutes of the Second National Working Conference on Foreign-related Commercial and Maritime Trials, evidence formed overseas must be subject to cross-examination in court, and its validity assessed in light of those proceedings, irrespective of its prior notarisation or authentication status.
Therefore, the court is obliged to subject uncertified foreign evidence to cross-examination and assess its credibility based on those proceedings, rather than rejecting its authenticity on the mere technicality of missing documentation.
Litigation challenges
Delay in asset preservation. When a major enterprise group faces a multi-creditor debt crisis, lenders are frequently sidelined during local restructuring efforts. In the captioned guarantee dispute, even sustained efforts by the lender syndicates, employing both direct dialogue and formal written requests, produce limited co-ordination. In this type of intricate cross-border recovery action, creditors must leverage all available channels to exert sustained pressure and defend their positions.
Strategic recalibration. During the proceedings, the syndicate strategically withdrew its claims against certain individual defendants. This decision, informed by the progress of parallel overseas proceedings, a fresh evaluation of the guarantor’s solvency and commitment, and developments in foreign asset recovery, underscores a key principle of cross-border actions – the need to concentrate resources on the most promising targets.
A “litigation and regulation” approach for multi-dimensional pressure. The creditor complemented its legal claims with non-judicial methods, notably by submitting multiple petitions to securities regulators. These argued that the company’s directors, embroiled in vast personal guarantee debts and adverse judgments, failed to meet the fitness requirements of the Company Law.
This tactic successfully framed the debt problem as an issue of regulatory compliance and corporate governance, placing the debtor under substantial reputational pressure.
Takeaways
Creditors facing indications of imminent default from a borrower or guarantor must act swiftly to identify property clues and devise a comprehensive solution. This plan should integrate domestic litigation, overseas procedures and regulatory petitions.
The combined use of legal actions, arbitration, regulatory complaints and media engagement forms an orchestrated strategy that exerts pressure across various fronts to achieve an optimal settlement.
Engaging China’s judicial system necessitates a thorough appreciation of its policy directives in collective debt cases, alongside a sober assessment of the complexities and long-time horizons inherent in cross-border enforcement.
As China continues to open its financial markets, the efficient resolution of international disputes and a sophisticated grasp of the relevant procedural rules are now vital to safeguarding investor rights and enhancing the commercial landscape.
Armstrong Chen is a senior partner at Dacheng Law Offices. He can be contacted by phone at +86 139 1002 0938 and by email at armstrong.chen@dentons.cn
Wang Xin is an associate at Dacheng Law Offices. She can be contacted by phone at +86 188 1783 7096 and by email at wangxin.shanghai@dentons.cn
