(By You Yunting) China’s financial system is restricted regulated. Private corporate lending contracts, whereby an enterprise without qualified financial credit lends money to another enterprise is considered to be invalid, and China’s courts would order the lenders return the original amount of money without any interest. Recently, the President of Supreme People’s Court Xi Xiaoming delivered a speech at the National Civil and Commercial Adjudication Work Conference, indicating that the courts have recently begun to expand the validity of corporate lending and are attempting to legalize corporate lending contracts.
1. The Previous policy was that corporate lending without qualified financial credit shall be invalid.
China adopts obligatory provisions to forbid corporate lending as well as borrowing and lending in a disguised form. Pursuant to Article 61 of the General Rules for Loans issued by People’s Bank of China, no financing business involving lending or borrowing, or lending and borrowing in a disguised form, may be handled between enterprises in violation of State provisions. Pursuant to Article 73, where enterprises engage in lending and borrowing or lending and borrowing in a disguised form between themselves without authorization, the People’s Bank of China shall impose a fine on the lender of between one and five times the income gained in violation of provisions, and the People’s Bank of China shall suppress such activities.
Pursuant to the relevant response of the Supreme People’s Court, enterprises’ lending contracts in violation of State financial laws and regulations will be held as invalid.
2. The court changed its attitude in deciding that short-term capital lending between enterprises will be valid.
The President of the Supreme People’s Court Xi Xiaoming’s speech pointed out, in the proceedings of the Civil and Commercial Judgment that, corporate lending should be distinguished according to the nature and validity of various individual factual circumstances. Where any enterprise unqualified for financial business actually engages in lending and uses the interest of lending as a major source of profit, the corporate lending contract shall be invalid. Upon confirmation that the corporate lending contract is void, in the event that the borrower and the lender are both at fault, the lender shall not obtain extraneous income. We hold that it is likely that the court will, on behalf of governments, charge interest from the lender.
According to the principle of fairness, the borrower shall pay back the principal herein to the lender plus the lending rate compared to the same period for the previous year. For an unqualified enterprise engaging in lending or borrowing with the purpose of normal production operations, and if the lending party is not designed to be a major receiver of profit, such corporate lending contracts are not in violation of State obligatory regulations upon financial management, and thus shall not be held as invalid.
3. Lending rate higher than four times of the bank’s shall be invalid.
In his speech, he revealed that, the previous judgment was that if there is an agreement about the lending rate between the lender and the borrower, the agreement should be abided by, however the sum of the interest rates and other fees should not be four times that of banks’ interest rates published by the People’s Bank of China.
However, the People’s Bank of China is easing its control over lending rates for commercial banks. With such circumstances as a backdrop, the judicial policy that prescribes this upper limit will be changed. Local courts may order four times that of an average of the interest rates, between different commercial banks, over the same period, for loans of a similar type.
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You Yunting：86-21-52134918 youyunting@debund.com/yytbest@gmail.com
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