1 Million Yuan Loan Default: Court Orders Repayment and Joint Guarantor Liability
In a significant private lending dispute, a court in eastern coastal China ordered two borrowers to repay 1,000,000 yuan in principal plus interest, while two guarantors were held jointly liable for the full debt amount.
Ms. Zhang lent 1,000,000 yuan to Mr. Zheng and Ms. Xu on February 5, 2010. The borrowers issued a promissory note confirming the loan amount and agreeing to a monthly interest rate of 3%. Mr. Zhang and Mr. Xiao signed the note as guarantors but did not specify the type or scope of their guarantee.
Mr. Zheng made interest payments until January 24, 2011, after which all payments ceased. Ms. Zhang made multiple demands for repayment of both principal and accrued interest, but her requests went unanswered.
In November 2011, Ms. Zhang filed suit seeking repayment of the 1,000,000 yuan principal along with interest calculated at four times the People’s Bank of China benchmark lending rate starting from January 25, 2011. She also requested that Mr. Zhang and Mr. Xiao bear joint and several liability for the entire debt.
None of the four defendants appeared in court despite receiving proper legal notice. The court proceeded with the hearing in their absence. During a separate court interview related to another case involving Mr. Zheng, he claimed that he did not know Ms. Zhang personally and had borrowed the money through an intermediary. He further asserted that he had already paid over 1,700,000 yuan to this intermediary, which he claimed covered both this loan and an additional 500,000 yuan borrowing. However, Mr. Zheng failed to provide any documentary evidence to support this claim and did not attend the hearing in the present case.
The court examined the evidence submitted by the plaintiff, including the original promissory note and two receipt documents confirming the transfer of funds. Finding that the evidence was authentic, legally obtained, and directly relevant to the dispute, the court accepted it as sufficient proof of the lending relationship.
Regarding the interest rate, the court noted that the agreed monthly rate of 3% exceeded the maximum level protected by law. Under relevant judicial interpretations, private lending interest rates are capped at four times the PBOC benchmark lending rate. The court therefore adjusted the interest calculation to this statutory maximum rather than the contracted rate.
On the guarantors’ liability, the court observed that Mr. Zhang and Mr. Xiao had signed the promissory note as guarantors without specifying either the guarantee method or the scope of their obligation. Under the Guarantee Law, when the guarantee method is not clearly agreed upon, the guarantor is presumed to bear joint and several liability. Similarly, when the scope is unspecified, the guarantee covers the full debt including principal, interest, damages, and enforcement costs.
The court rejected Mr. Zheng’s defense about having repaid the intermediary. Since he provided no evidence and failed to appear in court, the court treated his absence as a waiver of his right to challenge the plaintiff’s claims and evidence.
The court rendered a default judgment ordering Mr. Zheng and Ms. Xu to repay the 1,000,000 yuan principal within ten days, along with interest at four times the PBOC benchmark rate from January 25, 2011 until full payment. Mr. Zhang and Mr. Xiao were held jointly and severally liable for the entire debt. The court also confirmed that after fulfilling their guarantee obligations, the two guarantors would have the right to seek reimbursement from the primary borrowers.
This case illustrates the legal risks of serving as a guarantor without clearly defining the scope and method of guarantee. Under Chinese law, the absence of such specifications defaults to the most burdensome form of guarantee, namely joint and several liability for the full debt.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Consult a qualified attorney for legal matters.