In addition to common security measures such as mortgages, pledges, and guarantees, credit enhancement measures such as margin replenishment, liquidity support, and debt addition are also common in daily business operations. This article briefly reviews the legal provisions on debt accession and puts forward some practical suggestions, hoping to provide readers with certain reference and inspiration.

 

1、 What is debt accession

 

Debt accession is one of the common credit enhancement measures in corporate trading activities. Debt addition can also be referred to as concurrent debt assumption, which corresponds to exempted debt assumption. The core difference between the two lies in whether the original debtor is divorced from the creditor's debt relationship. When the original debtor continues to assume the debt, debt addition introduces a new debtor to jointly assume the debt, which has a creditor's rights guarantee effect, but is not limited by the guarantee period. As long as the debt matures, the creditor can claim against the debt addition person, without the need to make further claims based on the performance status of the original debtor. However, due to the quasi-guarantee nature of debt addition, creditors also need to exercise certain care obligations, otherwise they may face the consequences of invalid debt addition.

 

Before the promulgation of the Civil Code of the People's Republic of China (hereinafter referred to as the "Civil Code"), China mainly established rules for debt accession through judicial practice. For example, "Summary of Discussion on Several Issues Concerning the Application of the Contract Law of the People's Republic of China by the Higher People's Court of Jiangsu Province (I)" (SGFSW [2005] No. 16) defines debt addition as "A debt bearing method in which a third party enters into a tripartite agreement with the creditor or debtor, or a bilateral agreement between the third party and the creditor, or a third party unilaterally promises to the creditor that the debtor's debts will be performed by the third party, but at the same time, it does not exempt the debtor from performing its obligations.". Courts at all levels mainly clarify the rules for debt accession through some typical adjudication cases. [1] The "Notice of the Supreme People's Court on Printing and Distributing the Minutes of the National Civil and Commercial Trial Work Conference of Courts" (Law [2019] No. 254, hereinafter referred to as the "Nine People's Minutes") further clarifies the principle of adding debt to the permitted guarantee system.

 

After the promulgation of the Civil Code, Article 552 of the Contract Code clearly defines debt accession based on previous judicial practice. The "Interpretation of the Supreme People's Court on the Application of the Guarantee System in the Civil Code of the People's Republic of China" (hereinafter referred to as "the Guarantee Interpretation of the Civil Code") further explains the application of Article 552.

 

2、 What are the reasons, advantages, and disadvantages of debt addition

 

The author believes that the main reasons for the emergence of debt addition lie in its flexibility and the concept of legality without prohibition in contract law. "The parties may not be aware of the differences in the addition, assignment, or guarantee of debt, or the name and terms of the contract may not be very consistent.". Therefore, for lawyers, it is necessary to understand the transaction background and choose the most advantageous method for the client. For the referee, it is necessary to explore the original intention of the parties from the background and text, so as to make the most reasonable judgment.

 

The author believes that the advantages and disadvantages of debt are as follows:

 

Firstly, debt addition does not exempt the original debtor from its obligations, so it provides an additional safeguard for creditors compared to debt transfer.

 

Secondly, compared to general suretyship, debt accession does not have the right of defense to perform first, so debt accession is more conducive to protecting the interests of creditors than general suretyship contracts.

 

Thirdly, debt addition is compared to joint and several guarantees. In terms of protecting the interests of creditors, there is almost no difference. However, in terms of the interests of debt participants, there are significant differences. The law clearly stipulates that the guarantor can recover from the debtor after assuming the guarantee liability, but in the case of debt addition, there is no direct legal provision for the recovery of the original debtor by the debt addition person. Due to the formal provisions of laws and regulations on guarantee contracts, when the contract is vague, judges tend to identify this situation as debt addition rather than joint and several guarantees.

 

3、 What is the difference between debt participation and third-party performance, debt transfer, and guarantee

 

As mentioned above, due to the possibility that debt addition, third-party performance, debt transfer, and guarantee may involve third-party performance of debt, confusion can easily arise. This article summarizes the core differences between these types of behavior as follows for reference.

 

 

 

4、 Dispute resolution of debt accession

 

After searching the Wicko Advance Legal Information Database, from 2021 to now, after the entry into force of the Civil Code, there have been 39 judgments based on debt accession, including 31 first instance judgments. Although some of the facts of the case occurred before the entry into force of the Civil Code, there were no legal provisions for debt accession before the entry into force of the Civil Code, so these judgments were basically based on the provisions of the time effect of the Civil Code, and all judgments were made using the Civil Code.

 

Most judgments involve the determination of debt addition, and some also involve the distinction between debt addition and guarantee. According to the aforementioned judgment, in practice, the debt accession agreement between the parties may take various forms, such as an IOU, an agency settlement agreement, a debt undertaking agreement, etc., which may be confused with the performance and guarantee of a third party in terms of form. The court usually judges the nature of the parties' behavior based on the following factors to determine whether it constitutes debt accession: 1) Whether the debt truly exists; 2) Whether the debt participant has an intention to participate in the debt; 3) Whether the creditor has not explicitly raised objections to the debt addition.

 

5、 Characteristics of debt accession and legal practical suggestions

 

Debt addition is one of the common credit enhancement measures in business activities. Lawyers may be involved in drafting, reviewing, and revising relevant legal documents when providing perennial legal counsel or special legal advisory services for financing projects. In addition, lawyers may also participate in the dispute resolution process of debt inclusion disputes in the future.

 

According to Article 552 of the Civil Code and Article 36 of the Civil Code Guarantee Interpretation, the following points should be noted in the practical operation of debt addition:

 

First, the establishment of debt accession requires a third party to express its intention to join the debt, and the creditor has not explicitly refused. "When a third party debt is added, the original debtor does not disengage from the debt, which in essence adds additional protection to the realization of the creditor's rights. Therefore, only notification to the creditor is required, and the creditor does not explicitly refuse, without the explicit consent of the creditor.".

 

Therefore, in practice, in terms of the drafting and review of debt addition texts, from the perspective of creditors, it is possible to require the explicit use of expressions such as debt addition in documents, and to avoid words that may lead to confusion with third-party performance and guarantee guarantees.

 

Second, creditors can only require a third party to assume joint and several liability with the debtor within the scope of the debt they are willing to assume. Firstly, this requires that the added debt should be transferable or even divisible, and that a third party can choose to assume part of the debt within the scope of the original debt. Taking monetary debt as an example, a third party can choose to assume only a portion of it, rather than the full amount. Secondly, the original debtor did not leave the debt, and the third party only assumed joint and several liability with the original debtor to the extent that it was willing to assume when it joined.

 

Therefore, in practice, the debt addition document should clearly stipulate the debt and scope that the third party is willing to bear.

 

Third, creditors may need to exercise certain care obligations. Article 23 of the "Minutes of the Ninth People's Republic of China" stipulates the applicable guarantee rules for the legal representative to join the debt in the name of the company. Article 12 of the Guarantee Interpretation of the Civil Code stipulates that if the legal representative joins the debt in the name of the company, the relevant provisions on the guarantee provided by the company for others shall apply mutatis mutandis. Compared to the "Nine Minutes of the People's Republic of China", the "Civil Code Guarantee Interpretation" further limits the exceptions that do not require a resolution by a competent authority. Except for the cases where it is explicitly stipulated in Article 8 of the "Civil Code Guarantee Interpretation" that a company may not rely on a company's resolution, creditors need to at least conduct a formal review of the resolution document on their debt addition if the company provides debt addition. Otherwise, it is possible that due to the fault of the creditor, the third party to whom the debt is added will only bear part of the debt or will not bear any responsibility at all. [2]

 

Therefore, in practice, if the debtor is a company, it should be required to issue a document stamped with its official seal. Moreover, in addition to situations where there is a clear exemption resolution in the Civil Code Guarantee Interpretation, creditors should also require a third party to provide approval documents for debt addition by their authorized institutions (which may be resolutions of the board of directors or shareholders' meeting/shareholders' meeting, depending on their authority), as well as documents that determine that the authorized institutions have corresponding authority (such as the company's articles of association, etc.), in order to avoid failing to fulfill their duty of care, Resulting in the ultimate inability to request performance from the debt participant. From the perspective of the debt adding party, in order to avoid disputes arising from the subsequent recovery of the debtor, it is recommended that when the debt is added, the arrangement for recovery from the original debtor after performance of the debt be clearly agreed upon.

 

For dispute cases that may involve debt addition, it is first necessary to conduct a comprehensive analysis of the relevant transaction text based on the characteristics of debt addition, identify its nature, and avoid confusion with third-party performance and guarantee guarantees. Give full play to the advantages of debt participation, and timely advocate debt performance based on the specific circumstances of each debtor.

 

References and Notes:

 

[1] For example, China Urban Construction Holding Group Co., Ltd., Anxin Trust Co., Ltd. Business Trust Dispute Second Instance Civil Judgment ((2018) Supreme Court Min Zhong No. 867), Dali Lanlinge Real Estate Co., Ltd. Kunming Branch, Dali Lanlinge Real Estate Co., Ltd. Private Loan Dispute Second Instance Civil Judgment (2019) Supreme Court Min Zai No. 236), etc.

 

[2] See Article 17 of the Civil Code Guarantee Interpretation. For relevant cases, please refer to the civil judgment of second instance on the pawn dispute between Gannan Hongyun Mining Co., Ltd. and Qinghai Jufeng Pawn Co., Ltd. (No. 355 of the Supreme Court of Law and People's Court in 2021).

(This article is translated by software translator for reference only.)