Meaning
A legal obligation requires lenders to perform reasonable diligence when executing security agreements with corporate guarantors. In Chinese administrative practice, creditor duty of care requires that a bank or financial institution must examine the corporate charter and the authorization documents of the guarantor before accepting a guarantee. This prevents financial institutions from simply relying on the corporate seal or the signature of a manager without verifying if the board or shareholders actually authorized the transaction.
If the lender fails to perform this diligence, the security contract may be declared void, and the lender’s recovery options will be severely limited.
Verification Standard
Regulatory frameworks define the specific documents a lender must request to prove their diligence. These documents typically include the current business license and the signed resolution authorizing the transaction. Lenders who skip this step cannot claim they acted in good faith during later litigation.
Lender Diligence
Practical verification requires that the creditor must check the public corporate database to confirm the identity of the directors and shareholders who signed the resolution. This verification ensures that the signatures match the official filings. Lenders who perform this check are protected even if the resolution itself is later found to be forged.
Judicial Outcome
Decisions in Chinese courts will split the financial loss between the negligent creditor and the unauthorized guarantor if the contract is invalidated. The court will measure the degree of negligence of both parties to allocate the liability. This ensures that lenders cannot escape the consequences of poor diligence.
