4 Million Yuan Invalid Loan Contract: Export Agency Must Return Advance Payment After Borrower Defaults

A court declared a 4 million yuan loan contract between a trading company and a garment manufacturer invalid for violating financial regulations, but still ordered the manufacturer to return the full amount since an invalid contract requires restitution of any benefits obtained.

The trading company and the garment manufacturer had maintained a multi-year agency relationship for exporting garments. In February 2009, they signed an export agency agreement under which the trading company advanced 4 million yuan as raw material procurement funds. The manufacturer pledged its assets as security and promised to settle accounts after exporting the finished garments.

Between March and April 2009, the trading company transferred approximately 7.57 million yuan to the manufacturer through multiple payments. By January 2010, the parties confirmed through written reconciliation that 4 million yuan of the advance remained outstanding. They then renewed the agency agreement and signed a new loan guarantee commitment, setting a one-year repayment term for the 4 million yuan balance.

In January 2011, the parties renewed the agreement again, extending the loan for another year. However, by September 2011, the trading company learned the manufacturer had ceased production and was failing to pay employee salaries. The manufacturer’s legal representative became unreachable, and multiple suppliers had already filed lawsuits against the company, with its assets under judicial seizure.

The court determined that the loan arrangement between the two companies violated financial regulations prohibiting non-financial institutions from engaging in lending activities. Under contract law, such agreements are void, and any property obtained through an invalid contract must be returned. Although the contract was invalid, the manufacturer was still obligated to return the 4 million yuan it had received.

The court ordered the manufacturer to return 4 million yuan within ten days, with double interest on delayed payments. The 19,400 yuan court fee was borne by the defendant. The manufacturer’s absence from proceedings was treated as a waiver of its litigation rights.