Loan Default Leads to CNY 7 Million Dispute – Court Upholds Claims
A lender in Eastern China City filed a lawsuit against a borrower and multiple guarantors after a 7 million CNY loan went unpaid. The court upheld the lender’s right to recover the principal and interest, but reduced the penalty interest rate and rejected part of the mortgage claim due to incomplete registration. The ruling also clarified that a co-borrower’s commitment differs from a guarantor’s liability.
The plaintiff, a small loan company registered in Eastern China City, entered into a loan contract with Mr. Yu on September 28, 2011. The loan amount was 7 million CNY with a three-month term ending December 29, 2011, and a monthly interest rate of 20 per 1,000. Mr. Shao, the borrower’s spouse, issued a written commitment to share repayment responsibility. Several corporate and individual guarantors, including Lishen Cable Materials Co., Ltd., Changnan Activated Carbon Co., Ltd., Shentai Trading Co., Ltd., Hongtai Paper Co., Ltd., and individuals Mr. Gao, Mr. Huang, Mr. Zhang, Mr. Zhou, and Mr. Hong, provided guarantee letters for the full debt. Lishen also signed a maximum amount mortgage contract, pledging a tourism base property in Eastern China City as collateral, which was registered on July 25, 2011.
The plaintiff presented evidence including the loan contract, mortgage agreement, property certificates, guarantee letters, and a loan disbursement receipt. The lender also submitted a legal fee agreement with Zhejiang Tianfeng Law Firm showing 70,000 CNY in attorney costs. All defendants were properly summoned but failed to appear in court or file a defense, thereby waiving their right to challenge the evidence. The court accepted the plaintiff’s evidence as authentic, lawful, and relevant.
The court found the loan contract and related guarantee agreements valid and binding. Mr. Yu defaulted on interest payments from December 20, 2011, and failed to repay the principal at maturity. The co-borrower Mr. Shao did not fulfill his commitment, and none of the guarantors paid. The court ordered Mr. Yu to repay the 7 million CNY principal plus interest. However, the contractual penalty interest rate exceeded the legal ceiling of four times the central bank’s benchmark lending rate, so the court reduced it accordingly. The court also allowed the 70,000 CNY attorney fee as a recoverable cost under the contract.
On the mortgage claim, the court noted that the parties had registered the mortgage on several buildings of the tourism base, granting the lender a priority right over those specific properties. But the plaintiff also sought priority over an industrial land parcel in the same area. Because the plaintiff provided no evidence that the land mortgage was registered, the court denied that request, citing Article 187 of the Property Law, which requires registration for mortgage creation over real property. Regarding Mr. Shao’s liability, the court distinguished his written commitment from a guarantor’s role. Since he promised to assume joint repayment responsibility rather than a surety obligation, he was liable for the debt jointly with Mr. Yu, but not as a guarantor with joint and several liability. The other nine guarantors were ordered to bear joint and several liability for the full debt.
This case highlights several important legal points. First, penalty interest rates in loan contracts must comply with the statutory cap of four times the benchmark rate; any excess is unenforceable. Second, a mortgage over real property only becomes effective upon registration with the relevant authority. An unregistered mortgage gives no priority right. Third, a written commitment to share repayment may create joint liability rather than guarantee liability, affecting the creditor’s enforcement options. The court’s decision reinforces the principle that proper documentation and registration are essential for secured lending.
Disclaimer: This article is for informational purposes only and does not constitute legal advice.