Bank Seeks Repayment of CNY 9 Million Loan – Textile Company Defaults

The Eastern China City branch of a major bank brought a civil action against a textile company and its guarantors after the borrower failed to repay a loan of CNY 9 million. The bank sought to recover the principal amount along with interest, penalties, and enforcement costs, relying on a mortgage over industrial land and personal guarantees from two corporate and individual guarantors. The court heard the case in March 2012 and delivered a judgment in favor of the bank, holding all defendants jointly liable.

In March 2011, the bank and Ruixue Textile Co., Ltd. entered into a comprehensive credit facility agreement granting the borrower a total credit line of CNY 18 million, renewable until March 2012. Subsequently, the parties signed a separate loan agreement under which the bank advanced CNY 9 million to the textile company for a term of one year, with interest set at 6.961% per annum (the benchmark rate plus 15%). To secure the debt, Ruixue Textile granted a mortgage over a 10,396.4 square meter industrial plot in the same Eastern China City. Additionally, Xinwei Machinery Equipment Co., Ltd., Mr. Xu, and Mr. Zheng each executed individual maximum-amount guarantee contracts, undertaking joint and several liability for portions of the debt totaling CNY 18 million. The guarantees expressly waived any requirement for the bank to first enforce the mortgage before pursuing the guarantors.

At trial, the bank submitted the original credit facility agreement, the loan contract, the mortgage contract, two guarantee contracts, a loan receipt, the land use rights certificate, the mortgage registration certificate, and court records showing the borrower had been sued by other creditors. The defendants, Ruixue Textile, Xinwei Machinery, Mr. Xu, and Mr. Zheng, failed to appear or file any defense after being properly served by public notice. The court deemed that the defendants had waived their right to cross-examine the evidence. After reviewing the documents, the court found them authentic, relevant, and legally admissible, and therefore accepted them as proof of the bank’s claims.

The court determined that the loan agreement and the credit facility were valid and enforceable. The evidence showed that the bank had disbursed the full amount of CNY 9 million on March 30, 2011. Although the loan matured by the time of the hearing, the court noted that the borrower had defaulted earlier because it had been sued by other parties, which constituted an event of default under the credit agreement. This default allowed the bank to declare all outstanding amounts immediately due. The court further confirmed that the mortgage had been properly registered and that the two guarantee contracts clearly imposed joint and several liability on each guarantor for their respective capped amounts.

Applying general contract law principles, the court emphasized that a lender may accelerate repayment when a borrower triggers a default clause, especially if the borrower’s financial condition deteriorates or litigation arises. The guarantee contracts here contained an explicit “no requirement to first enforce the mortgage” clause, meaning the bank could directly demand payment from the guarantors without exhausting remedies against the land. The court also noted that the interest rate and penalty provisions in the loan contract – an additional 50% penalty on overdue principal and compound interest on unpaid interest – were within the scope agreed by the parties and were not challenged. Accordingly, the court upheld the bank’s claim for all amounts due.

This case reinforces the principle that well-drafted security documents – including mortgages and unconditional guarantees – provide lenders with strong protection in the event of borrower default. The court’s decision to hold all guarantors jointly liable, even without first foreclosing on the mortgaged property, underscores the enforceability of “direct recourse” clauses in Chinese commercial lending. Borrowers and guarantors should be aware that signing such agreements exposes them to immediate and full liability once a default occurs. Lenders, in turn, can rely on court judgments to recover debts through asset seizure and sale.

Disclaimer: This article is for informational purposes only and does not constitute legal advice.