Section I Procedural Issues relating to litigation of Cross-border Guarantees and Asset Preservation Measures in Mainland China
With the recent increase in defaults in cross-border financing and investment, we are frequently consulted on how to deal with cross-border investment and financing disputes. For overseas investors, the main concerns are:
- Procedural Issues: how to most efficiently initiate debt recovery actions in Mainland China and how to coordinate legal actions in different jurisdictions; and
- Substantive Issues: how to ensure the effectiveness and enforceability of financing and credit enhancement arrangements, and how to effectively obtain control of entities operating in Mainland China.
Based on our experience in dealing with relevant disputes, this article sets out some practical views on noteworthy procedural and substantive issues. This article will address three common questions regarding litigation on cross-border guarantees and property preservation measures in Mainland courts. Other procedural issues (including qualified defendants, non-exclusive jurisdictional clauses and parallel litigation) and substantive issues on cross-border fund investments and corporate control will be covered in subsequent articles.
1. In cross-border financing transactions, if the main contract and the guarantee are governed by the laws of different jurisdictions, and the guarantee is governed by the law of Mainland China, can the creditor separately initiate litigation on the guarantee in Mainland China?
Generally, the creditor may take separate legal action against the Mainland guarantor in this scenario. However, under Article 9 of the Minutes of the Second National Conference on Foreign Commercial Maritime Judgments (the "Minutes")1 , issues under of the main contract (e.g. the amount of the guaranteed debt, the validity of the main contract) need to be addressed, if:
(i）the guarantor enjoys the right of pre-action defence (as with a general guarantee from a PRC law perspective); or
(ii) the amount of the guaranteed debt needs to be verified before the court can determine the guarantee issue.
Cross-border guarantees are generally not general guarantees. Nevertheless, if the court is unable to identify the amount of the guaranteed debt and the case cannot be mediated, the court will dismiss the creditor's claim. Generally, the Mainland court will adopt the following approaches to identify the amount of the guaranteed debt.
- Adding the debtor as a co-defendant: if the court has jurisdiction under the main contract (which is often the case where the main contract contains a non-exclusive submission to the jurisdiction of a foreign court), the plaintiff may be required to add the debtor as a co-defendant.
For example, in the case of (2016) Guangdong 01 Min Zhong No.14763, the main contract included a non-exclusive submission to the jurisdiction of the Hong Kong court, but the guarantee included an exclusive submission to the jurisdiction of a Mainland court. The guarantor was a PRC corporation, and the creditor chose to pursue the guarantor, and listed the debtor as co-defendant. In its decision, the Guangzhou Intermediate People's Court endorsed this approach by asserting that it also had a non-exclusive jurisdiction over the dispute under the main contract.
- Stay of proceedings pending the final judgment or award in the main contract dispute: if the Mainland court does not have jurisdiction under the main contract, it does not have the authority to determine any issue relating to the main contract. It must stay the trial, and request the creditor to commence foreign proceedings or arbitration against the debtor to confirm the amount of the guaranteed debt. The court will resume the trial once the creditor submits the final judgment or award. However, there are two concerns worth noting:
A. The duration of the foreign proceedings: If the foreign legal proceedings concerning the main contract exceed the length of the stay designated by the Mainland court, or the duration of the foreign proceedings is otherwise is too lengthy, the creditor’s guarantee case in the Mainland court may be dismissed.
For example, in the case of (2016) Guangdong 03 Min Chu1896-2, the Mainland court found that it had been nearly three years since the plaintiff initiated proceedings concerning the guarantee, and the date of the decision concerning the main contract was still not available. The court eventually ruled that the plaintiff's claim was dismissed.
B. How to use the foreign judgment or award: It is remains uncertain whether an effective judgment or award made by a foreign court or arbitral institution constitutes an "effective judgement or award" under PRC law without going through recognition and enforcement proceedings.
(i) Arbitral Awards: In a dispute handled by us on behalf of an overseas investor, the arbitral tribunal in a related HKIAC arbitration case (involving determining the amount of the debt) rendered a valid arbitral award, and we immediately applied to the Mainland court to resume the trial. The debtor argued that the HKIAC arbitral award had not been recognised in a separate proceeding and therefore was not an "effective award" under PRC law and could not be adopted.Instead of raising further arguments on the definition of "effective award" under PRC law, we made our case on the basis of the “exemption of proof” rule under Article 10 of the Provisions of the Supreme People's Court on Evidence in Civil Proceedings (the "Evidence Provisions")2 . Paragraph (5) of Article 10 of the Evidence Provision provides that "a fact finding in an effective award issued by an arbitral institution" is a “fact exempt from proof”. We argued that paragraph (5) did not limit the type of arbitral institution, and therefore the effective arbitral award issued by the HKIAC met the requirements and the fact findings in the HKIAC arbitral award should be deemed fact exempt from proof. Eventually the court was persuaded to resume the trial and adopt the findings of the award into its judgement.
(ii) Judgments: However, according to Article 10(6) of the Evidence Provision, the circumstances where a fact finding in a court judgment constitutes a “fact exempt from proof” are limited to a judgement or ruling made by a "people's court", so a judgment made by any foreign court does not benefit from this rule.
The Supreme People's Court ruled in (2011) Min Shen Zi No. 259 that "the final judgments and rulings made by foreign courts, without going through recognition and enforcement proceedings, cannot be directly used as evidence in civil litigation cases heard by Chinese courts.”
Nevertheless, in recent years, some Mainland courts have taken a different view of the need for a plaintiff to go through the entire recognition and enforcement process before a foreign judgement can be used in a Mainland court. For example, in the case of (2015) Guangdong High Law Min Si Tazi No. 16, the Guangdong High People’s Court accepted a notarised judgment of the Hong Kong High court as evidence to resolve the factual issue of the amount of the debt owed under the main contract.
- Verifying the amount of the guaranteed debt based on valid supporting documents or the debtor’s or the guarantor’s admission:
(i) Valid Supporting documents: the Mainland court may determine the amount of the guaranteed debt after examining the supporting documents submitted by the creditor. In practice, the Mainland court generally does not examine the content of contractual documents over which they do not have jurisdiction.
Therefore, foreign creditors are advised to collect and submit evidence such as a letter signed by the debtor/guarantor after the event of default confirming the amount of the debt to prove that the amount of the guaranteed debt is not in dispute. If the relevant documents were entered into outside Mainland China, they need to be notarised and certified3. If the documents are governed by the law of a foreign jurisdiction, it may be necessary to prove the relevant aspects of that law.
(ii) In the absence of valid documentary evidence between the parties confirming the amount of the guaranteed debt, attempts can be made to obtain the guarantor's admission on this point during the course of the hearing.
In our experience of a dispute regarding a cross-border collateral contract, we were able to get the guarantor to admit to the tribunal the amount of principal and interest comprising the guaranteed debt during the arbitral hearing. The arbitral tribunal eventually recognised the amount of guaranteed debt and did not require the creditor to file a separate lawsuit in relation to the facility agreement in the Hong Kong court.
2. Can the security agent for a cross-border syndicated facility act directly as a plaintiff in the Mainland court to exercise rights under a guarantee?
Before the promulgation of the Civil Code and its judicial interpretation, courts and arbitral institutions in the Mainland often invoked the "principal-agent relationship" to support the validity of the security agent’s position. However, there is a basic legal principle under PRC guarantee law that rights under a guarantee cannot be exercised separately from the creditors’ rights under the main contract. Thus, although there are several supportive cases, there was no statute confirming that the security agent was a proper plaintiff or claimant and could bring legal action to exercise rights under the guarantee.
This issue has now been resolved. Under Article 4(3) of the Interpretation of the Supreme People's Court on the Application of the Civil Code of the People's Republic of China in Respect of the Guarantee System4 promulgated by the Supreme Court in 2021, if a guarantor is aware of the existence of a principal-agent relationship between the creditor and the agent, either the agent or the creditor is entitled to make a claim in their own name.
3. If the creditor has taken judicial measures outside Mainland China, can the creditor also take property preservation measures in Mainland China against the debtor's or the guarantor’s assets?
Under the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region (the “Interim Measure Arrangement”), if the arbitration proceedings are seated in the Hong Kong and administered by any institutions or permanent offices covered by Article 2 of the Interim Measure Arrangement5 , the applicant in the arbitration may apply to the Mainland court for preservation of the assets of the opposing party before the arbitral award is made.
In order to ensure the timeliness of preservation, key points requiring attention are: the coordination and preparation of bilingual versions of the applications, the notarisation procedure, and issuance of the notice of arbitration and the relevant documents by the arbitral institution. Furthermore, although the Interim Measure Arrangement allows applicants to apply to the Mainland court for pre-arbitration asset preservation, in practice the Mainland court is reluctant to grant this.
Except for the circumstances mentioned above, there is no judicial arrangement regarding interim measures between Mainland China and foreign jurisdictions. If the dispute is arbitrated or litigated in a foreign jurisdiction, it is effectively impossible to achieve asset preservation in the Mainland in parallel with the foreign proceedings.
This is the first part of our discussion on key procedural issues in cross-border financing dispute resolution. Subsequent reviews of the topics will be posted in several parts. Please give us your feedback on the topics you would like us to discuss.
- Minutes of the Second National Working Conference on the Trial of Foreign-Related Commercial and Maritime Cases-Fa Fa  No.26
(9) Where the principal debtor under a guarantee is not within China while the creditor lodges a lawsuit in China with a people's court only against the guarantor, the people's court shall exercise its jurisdiction in accordance with the relevant provisions prescribed in the Civil Procedure Law of the People's Republic of China. At trial, where according to the governing law of the guarantee , the guarantor is entitled to beneficium excussionis, (in other words the amount claimed under the master contract being determined first), the people's court may handle the case in the following ways, depending on the circumstances: (a) where the people's court has jurisdiction over the disputes arising from or in connection with the master contract, the people's court may require the plaintiff to add the principal debtor as the co-defendant within a specified time period; (b) otherwise, the people's court will suspend the trial and require the creditor to lodge a lawsuit or file an arbitration against the principal debtor or determine the claim amount by other means, within a certain period specified by the people's court. Where the creditor lodges a lawsuit or files an arbitration against the principal debtor within the specified period or where the claim amount may be determined by other means, the people's court will resume the trial once the creditor submits the relevant effective ruling or other evidentiary documents.
Where the creditor refuses to apply for the addition of the principal debtor as the co-defendant within the specified period, or fails to lodge a lawsuit or file an arbitration against the principal debtor, or where the claim amount is not determined by other means, and the mediation by the people's court fails, the lawsuit lodged by the creditor will be overruled.
- Provisions of the Supreme People's Court on Evidence in Civil Proceedings-Fa Shi  No.19
Article 10 For any of the following facts, a party concerned shall be exempt from the burden of proof:
(1) A law of nature, including a theorem or law;
(2) A widely-known fact;
(3) A fact that can be presumed according to a legal provision;
(4) A fact that can be presumed according to a known fact and a rule of thumb;
(5) A fact confirmed by an effective arbitration award of an arbitral institution;
(6) A basic fact confirmed by legally effective ruling of the people's court; and
(7) A fact certified by a validly notarized document.
Exception shall be made for a fact stated in Items (2) to (5) of the preceding paragraph if a party concerned produces evidence to the contrary which sufficiently refutes the fact; exception shall be made for a fact stated in Items (6) and (7) if a party concerned produces evidence to the contrary which sufficiently repudiates the fact.
- Provisions of the Supreme People's Court on Evidence in Civil Proceedings-Fa Shi  No.19
Article 16 In the event that a public documentary evidence provided by a party concerned is developed outside the territory of the People's Republic of China, such evidence shall be notarized by a notary organ of the country where such evidence is collected or be certified through the procedures as stipulated in relevant treaties signed by and between the People's Republic of China and said country.
The evidence relating to identity relationship as developed outside the territory of the People's Republic of China shall be certified by a notary organ of the country where such evidence is collected and shall be certified by the embassy or consulate of the People's Republic of China in said country, or be certified through the procedures as stipulated in relevant treaties signed by and between the People's Republic of China and said country.
In the event that the evidence provided by a party concerned to the people's court is developed in Hong Kong, Macau or Taiwan region, such evidence shall be certified through relevant procedures.
- Interpretation of the Supreme People's Court on the Application of the "Civil Code of the People's Republic of China" in Respect of the Guarantee System - Fa Shi  No.28
Article 4 Under any of the following circumstances, if the party concerned has registered a security interest under another's name and the debtor defaults or if the conditions for realisation of the said interests, as agreed upon by the parties concerned, arise, the people's court shall uphold in accordance with the law the claim of the creditor or the entrusted person thereof for priority in receiving payment from such property:
(1) The security interests provided to a holder of bonds are registered under the name of the trustee of the bonds;
(2) The security interests provided to the entrusting party for a loan are registered under the name of the entrusted party; or
(3) Other circumstances where the guarantor is aware of the existence of a trust relationship between the creditor and another person.
- Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region
Article 2 For the purpose of these Arrangements, Hong Kong arbitration proceedings shall be seated in the HKSAR and administered by any of the following institutions or permanent offices:
(1) Arbitration institutions that are established or headquartered in the HKSAR and that take the HKSAR as the main place of administration;
(2) Dispute resolution bodies or permanent offices that are established in the HKSAR by intergovernmental international organizations joined by the People's Republic of China; or
(3) Dispute resolution bodies or permanent offices established in the HKSAR by other arbitration institutions, provided that these dispute resolution bodies or permanent offices shall meet the standards set by the HKSAR Government on the number of arbitration cases, the value of subject matters, etc.
The list of the above institutions or permanent offices shall be provided by the HKSAR Government to the Supreme People's Court and be confirmed by both sides.