Regarding the issue of whether the guarantors can recover from each other, the relevant legal provisions of China's security law have actually undergone an evolutionary process. According to Article 13 of the currently effective "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", "... Except for the circumstances specified in the preceding two paragraphs, if a guarantor who has assumed the guarantee responsibility requests other guarantors to share the portion that cannot be recovered from the debtor, the people's court shall not support it.".

Summary of the case

Case source: Civil Ruling on Retrial Review and Trial Supervision of Recourse Dispute between Huashang Zhihui Media Co., Ltd. and Xu Zhe et al. [Beijing Higher People's Court (2020) Jingminshen No. 4580 Decision Date: October 29, 2020]

On December 1, 2017, Ammai Company (the borrower) borrowed 13 million yuan from the lending bank (the lender), and both parties signed the "Loan Contract".

On November 27, 2017, Cultural Company (Guarantor) signed the "Entrusted Guarantee Contract" with Ammai Company (Entrusted Guarantor), stipulating that Cultural Company agreed to provide joint and several liability guarantees to creditors for Ammai Company's obligations under the "Loan Contract".

On November 27, 2017, Cultural Corporation (guarantor), Huashang Corporation (counter guarantor), and Ammai Corporation (borrower) signed a "Credit Counter Guarantee Contract", stipulating that Huashang Corporation shall provide a credit joint liability guarantee counter guarantee for Cultural Corporation in the form of guarantee.

On November 27, 2017, Zhao Heng and Xu Zhe issued an "Unlimited Joint and Several Liability Commitment Letter" to the cultural company, stating that they are willing to provide counter guarantees for the cultural company in the form of unlimited joint and several liability with all their respective property.

In addition to Huashang Company, Zhao Heng, and Xu Zhe, the counter guarantors of the cultural company also include Gu Bin, Liu Xiaofeng, Feng Jianguo, and Xiang Hua. A total of seven persons act as joint and several liability counter guarantors. Each counter guarantor has not agreed on a guarantee share externally, and has not agreed on a share proportion internally.

On October 17, 2018, in the event that Anmai Company was overdue and the Cultural Company did not assume the guarantee liability, Huashang Company directly transferred 3 million yuan to the Cultural Company. The summary stated that "our company repaid the bank loan on behalf of Beijing Anmai subsidiary and entrusted Beijing Wendan to transfer it to Bank of Beijing".
Huashang Company filed a lawsuit with the People's Court of Chaoyang District, Beijing, requesting the borrowers, Anmai Company, and the counter guarantors, Zhao Heng and Xu Zhe, to repay the guaranteed compensation of 3 million yuan and pay interest.

The court held that

Regarding whether Huashang Company has the right to recover from other guarantors:

The court of first instance, Beijing Chaoyang Court, held that:

According to legal provisions, when two or more guarantors provide guarantees for the same debt simultaneously or separately, if each guarantor and the creditor have not agreed on a guarantee share, it shall be recognized as a joint and several guarantee. "After the guarantor of a joint and several guarantee has assumed the suretyship responsibility, the portion that cannot be recovered from the debtor shall be shared by the joint and several guarantors in accordance with their internal agreed proportion. If there is no agreement, the share shall be shared equally.". Accordingly, Zhao Heng, as one of the counter guarantors, and Xu Zhe, as one of the counter guarantors, shall each bear the liability for paying off one seventh of the amount claimed by Huashang Company.

The Beijing Third Intermediate Court of the Court of Second Instance held that:

According to the principle that the new law is superior to the old law, the provisions in the security law and its judicial interpretation regarding mutual recourse between guarantors are no longer applicable due to conflicts with the property law, unless otherwise agreed between the parties. Therefore, after assuming the guarantee responsibility, the guarantor can only recover from the debtor, and has no right to recover from other guarantors. In this case, after assuming the guarantee obligation, Huashang Company can only recover from the debtor, and has no right to recover from other guarantors. The reasons are as follows.

Firstly, theoretically speaking, there is no contractual relationship between the counter guarantors, and it is not in accordance with legal principles to require them to provide guarantees for the debtor and other guarantors. In this case, the counter guarantors of Huashang Company, Zhao Heng, Xu Zhe, and other parties issued counter guarantee agreements and commitment letters. Each agreement is independent and there is no relevant agreement on mutual recourse between the counter guarantors. Therefore, after Huashang Company assumes the guarantee responsibility, it lacks the contractual basis and theoretical basis for recourse from other guarantors;

Second, violating the principle of litigation economy. The debtor is the ultimate obligor. When there are multiple guarantors, allowing them to claim compensation from each other after assuming the guarantee liability may lead to multiple litigation proceedings for mutual compensation, ultimately leading to more litigation for recovery from the debtor. Therefore, considering the principle of litigation economy, the right of recourse between guarantors should not be allowed;

Thirdly, as mentioned above, if there are multiple cases of recourse rights, there is a lack of operability in determining the share of recourse when there are multiple guarantors, especially when guarantees and security interests coexist;

Fourth, consider based on the principle of fairness. When establishing a guarantee, each guarantor has clear and specific provisions regarding the possibility of recourse against the debtor only after assuming the guarantee liability. Allowing warrantors to recover from each other in the absence of an agreement on mutual recovery reduces the risks that the guarantor can foresee when establishing a guarantor.

Based on this, the court of second instance revised the judgment of the court of first instance that the Chinese merchant company could pursue compensation from other counter guarantors Zhao Heng and Xu Zhe.

The Beijing High Court of the retrial court held that:

Partially consistent with the opinion of the court of second instance. The Beijing High Court rejected the retrial application of the Chinese business company.

Case Analysis

As mentioned in the judgment of the court of second instance in this case, regarding the issue of whether the guarantors can recover from each other, China's legal provisions have actually undergone an evolutionary process. Article 12 of the "Guarantee Law" promulgated in 1995 stipulates: "If there are two or more guarantors for the same debt,... the guarantors who have already assumed the guarantee liability have the right to recover from the debtor or require other guarantors who bear joint and several liabilities to pay off their share of the debt.". Article 38 (1) of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Guarantee Law of the People's Republic of China issued in 2000 stipulates that: "Where the same creditor's right has both a guarantee and a material guarantee provided by a third party,... if the parties have not agreed on the scope of the guarantee or the scope of the material guarantee or the agreement is unclear, the guarantor who has assumed the guarantee responsibility may recover from the debtor or require other guarantors to pay off their share." The above legal provisions give the guarantor who has assumed the guarantee responsibility the right to freely choose to recover the debtor or other guarantors. However, the "Property Law", which came into force in 2007, has avoided this issue. The relevant provision on this issue in the Property Law is Article 176, This article stipulates that: "If the secured creditor's right includes both physical and personal security, and the debtor fails to fulfill its due debts or there are circumstances agreed upon by the parties to realize the security interest, the creditor shall realize the creditor's right in accordance with the agreement. If there is no agreement or unclear agreement, and the debtor provides physical security, the creditor shall first realize the creditor's right based on the physical security. If a third party provides physical security, the creditor may realize the creditor's right based on the physical security, The guarantor may also be required to assume the guarantee responsibility. "After assuming the guarantee liability, the third party providing the guarantee has the right to recover from the debtor.". It can be seen that the "Property Law" does not explicitly stipulate whether the guarantor can recover from other guarantors. Article 392 of the Civil Code completely absorbs the provisions of Article 176 of the Property Law, which does not explicitly stipulate whether the guarantor can recover from other guarantors. The issue of the right of recourse between guarantors has undergone an evolution from affirmation to ambiguity. Perhaps this is the reason why the court of first instance in this case still applies the provisions of the Guarantee Law and its judicial interpretation to adjudicate, and accordingly decides that Huashang Company can pursue recourse from other counter guarantors.

Regarding this blank in the law, Huang Wei, director of the Civil Law Office of the Legal Working Committee of the National People's Congress, pointed out in his book "Interpretation of the Real Rights Compilation of the Civil Code of the People's Republic of China": "After research by the Legal Working Committee, it is considered inappropriate to stipulate that the warrantors should seek compensation from each other without explicitly agreeing to assume joint and several guarantee responsibilities.". The reasons are basically consistent with those discussed by the court of second instance in this case. The Supreme People's Court directly stipulated this issue in Article 13 of its "Interpretation on the Application of the Civil Code of the People's Republic of China on the Guarantee System" (hereinafter referred to as the "Interpretation on the Guarantee System of the Civil Code"), and also provided for exceptions to the recourse between guarantors. This article stipulates that: "If the same debt is guaranteed by two or more third parties, and the guarantors agree to recover from each other and share their shares, the people's court shall support the case where the guarantor who has assumed the guarantee responsibility requests other guarantors to share their shares in accordance with the agreement. If the guarantors agree to assume joint and several joint guarantees, or agree to recover from each other but have not agreed to share their shares, the guarantors shall share the portion that cannot be recovered from the debtor in proportion. The same debt "If two or more third parties provide guarantees, and there is no agreement between the guarantors on mutual recovery and no agreement on joint and several guarantees, but each guarantor signs, seals, or fingerprints the same contract, and the guarantor who has assumed the guarantee responsibility requests other guarantors to share the portion of the debtor that cannot be recovered in proportion, the people's court shall support it.". "Except for the circumstances specified in the preceding two paragraphs, if a guarantor who has assumed the guarantee responsibility requests other guarantors to share the portion of the debt that cannot be recovered from the debtor, the people's court shall not support it.".

It can be seen that, according to the current effective legal provisions, if there is no agreement between the guarantors that they can recover from each other, or if there is no communication of intent between the guarantors for joint and several guarantees, the guarantors cannot recover from each other. "Only when there are circumstances between the guarantors specified in Article 13, Paragraphs 1 and 2, of the Interpretation of the Civil Code Guarantee System, that is, there is a clear agreement that mutual recourse can be made, or there is a communication of intent to provide joint and several guarantees, can mutual recourse be made, and the principal debtor should be first sought for compensation, and the part that the principal debtor cannot recover should be sought from other guarantors.". The judgment of the court of first instance in this case is obviously outdated and wrong.