Debt Undertaking or Debt Accession?

Company A owes 2 million to Company B. Company C expressed its willingness to repay for Company A, and signed a repayment agreement with Company B. After repaid 500,000, Company C did not want to repay anymore. Company B asked Company A to repay the remaining debt. Company A defended that the 2 million debt had been transferred to Company C. Then who shall be responsible for the remaining debt? To answer this question, the key point is to define the intention of the repayment agreement. Is it a debt undertaking or a debt accession?

According to the “Contract Law”, Debt Undertaking has 2 categories: (a) A third party would like to repay for the obligor. According to Article 65 of the “Contract Law”, where the parties agree that a third party performs the obligations to the obligee, and the third party fails to perform the obligations or the performance is not in conformity with the agreement, the obligor shall be liable to the obligee for breach of contract. In view of this, (a) does not require the consent of the obligee, and the third party shall not be deemed as a party in the debt relationship. The case in the beginning does not belong to this category. (b) The narrowly defined debt undertaking. According to Article 84 of the “Contract Law”, where the obligor delegates its obligations under a contract in whole or in part to a third party, such delegation shall be subject to the consent of the obligee. In view of this, for this category, the obligor has been completely or partially separated from the original debt, and it is not responsible for the debt. Therefore, if the third party has agreed with the obligee that the third party would repay the debt, and the obligor would not be responsible for the debt, then when the third party fails to repay, the obligee should not claim to the obligor.

There are no laws or regulations which have prescribes Debt Accession till now. In the judicial practice, some local courts have issued some guidelines. For example, Article 17 to 19 of the “Summary on Discussing Several Issues in the Application of the ‘Contract Law’ by the Jiangsu Provincial Higher People’s Court” (“Summary”) have specified the judgment rules on Debt Accession. The judgment rules include, (a) Debt Accession refers to a debt repay method that a third party would repay for the obligor, but the obligor has the joint liability for the debt. Normally such agreement could be stipulated in a tri-parties agreement among the third party, the obligee and the obligor, or an agreement between the obligee and the third party, or a commitment issued by the third party. (Note: the author has concern on the commitment issued by the third party, because such commitment might mislead the obligor to defend that it has been separated from the debt.) (b) If the third party and the obligee fail to stipulate that the obligor could be separated from the debt, then the obligee could require the obligor to repay. (c) Unless otherwise agreed on the liabilities in the agreement or commitment herein above, the obligee could require the obligor to undertake a joint liability. In summary, Debt Accession could be interpreted as to add a “obligor”. Generally speaking, the judicial practice view is as similar as the above “Summary”.

In individual cases, the basic opinion of the Supreme Court is that where the involved parties failed to stipulate that the obligor could be separated from the debt in the agreement, then such agreement shall be deemed as Debt Accession, no matter whether the agreement has stipulated that a third party commits to repay, or is willing to undertake the debt, or repays the debt for the obligor. For example, [2006]Min Er Zhong Zi No.199, [2010]Min Ti Zi No.153, [2013]Min Si Zhong Zi No.22, [2014]Min Shen Zi No.1250, and [2014]Min Shen Zi No.460 .
Therefor, if an enterprise has similar behavior as Company C, it shall determine its real intention, to repay for the obligor, the narrowly defined debt undertaking, or Debt Accession. Then the enterprise could design articles in the relevant documents based on its real intention.