The Topsoft Cases: The Perils of Loan Guarantees

By Lily Wei Zhou, [email protected]

In China as elsewhere, winning a court judgment against a judgment-proof defendant might not be an event worth celebrating. While the chances of recovery have been slim for the plaintiffs who won suits against Shenzhen Stock Exchange-listed company Sichuan Topsoft Investment Co., Ltd. (Topsoft), the root causes that led to the reckless issuance of loan guarantees by such listed companies and their acceptance by lenders may be unique to China.

In 2004, Sichuan People's High Court held that Topsoft should repay over Rmb50 million to CITIC Industrial Bank pursuant to the guarantee Topsoft provided for the loans of one of its subsidiaries in Chengdu, and a local court in Chongqing also held that Topsoft should repay China Merchants Bank Co. over Rmb20 million pursuant to the guarantee it provided for the loans of one of its subsidiaries in Chongqing. The winning plaintiffs in these two cases were perhaps no better situated than the plaintiffs in any of the other numerous lawsuits against Topsoft. According to news reports, Topsoft was named as the defendant or co-defendant in around 80 different lawsuits for the “reckless guarantees of loans” it had provided to other parties (mostly affiliates) and also for the default of its own debt.