This content is from: Local Insights

Guarantor protection

The Special Law on Guarantor Protection (the SLGP) was passed during the parliamentary session held on February 19 2008. The SLGP will be enforced six months after it is promulgated by the president, and it will apply to newly established or renewed guarantee contracts.

Under the SLGP, guarantors will generally be protected except for guarantors to the following guarantees: (i) any guarantee that a company provides to a third party in connection with the company's business, (ii) any guarantee that a representative, director, general partner, controlling shareholder or an individual who controls the company provides in connection with the liabilities of that company, (iii) any guarantee that a spouse, immediate family member or any individual who has a special relationship with any person listed in (ii) provides in connection with the liabilities of a company and that such a guarantor has an interest (including economic interest) in such a company, or (iv) any guarantee that an individual provides for a debtor regarding the debtor's liabilities, in which the individual and the debtor have a business relationship.

Some of the other key aspects of the SLGP are highlighted below:

The maximum guarantee amount will now need to be specified in guarantee contracts. In particular, if a maximum guarantee amount is not specified in a kun-guarantee contract, the kun-guarantee will not be valid.

If the main debtor has not performed its obligations for at least a three-month period or if the creditor recognises, before the expiration of the three-month period, that the main debtor cannot fulfil its obligations, the creditor is now required to notify the guarantor of this fact. A creditor that is a financial institution needs to notify the guarantor if the main debtor fails to fulfil its obligations for at least one month.

If no timeframe is specified in a guarantee contract, the term of the guarantee will be for three years. If a financial institution enters into a guarantee contract as a creditor, the financial institution must submit the debtor's written credit report (with approval from the debtor) to the guarantor, and it shall receive the guarantor's signature on that credit report.

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