Invalid Enterprise Loan: Court Orders Repayment of CNY 2 Million
In a recent civil case heard in an Eastern China City court, a dispute arose between two local companies over an unpaid loan. The plaintiff, a stationery company, sought repayment of CNY 2 million plus interest from the defendant, a food company. The court ruled that the loan agreement was invalid because it violated prohibitions on inter-enterprise lending, but still ordered the defendant to return the principal and compensate for interest losses.
The case began on January 5, 2012, when the defendant company borrowed CNY 3 million from the plaintiff to facilitate a bank loan renewal. The next day, the defendant repaid CNY 1 million, leaving a balance of CNY 2 million unpaid. After repeated demands went unanswered, the plaintiff filed a lawsuit on February 6, 2012, asking the court to order the defendant to return the remaining CNY 2 million and pay interest from the date of filing until full repayment, calculated at the bank’s benchmark lending rate. The plaintiff also applied for and obtained a property preservation order against the defendant.
The court held a public hearing on March 5, 2012. The plaintiff’s legal representatives, Mr. Wang and Mr. Chen, attended and submitted two pieces of evidence: a bank payment instruction dated January 5, 2012, showing the transfer of CNY 3 million, and a bank credit notice dated January 6, 2012, confirming the repayment of CNY 1 million. The defendant, despite being properly served with a summons, did not appear at the hearing and filed no written defense or evidence. The court examined the evidence and found it to be legally sourced, relevant, and sufficient to prove the facts alleged by the plaintiff.
The court found that the loan between the two enterprises was a form of inter-enterprise lending. According to relevant law, such lending is prohibited because it violates state regulations governing financial order. The court held that the loan agreement was therefore invalid under Article 52(5) of the Contract Law, which declares void any contract that violates mandatory provisions of laws or administrative regulations. Because the contract was invalid, the defendant had no legal basis to retain the borrowed funds and was obligated to return them.
Under Article 58 of the Contract Law, when a contract is invalid, each party must return what it received from the other. The court applied this principle and ordered the defendant to return the full principal of CNY 2 million. Additionally, the court ruled that the defendant must compensate the plaintiff for interest losses calculated from the date the lawsuit was filed (February 6, 2012) until the date of actual payment, using the bank’s benchmark lending rate for the same period. The court also noted that if the defendant fails to pay within the specified period after judgment, it must pay double the interest on the overdue amount as provided by civil procedure law.
The court also allocated the costs of the case. The plaintiff had paid a case acceptance fee of CNY 22,800, which was reduced to CNY 11,400 because the case was decided by a single judge, plus a property preservation fee of CNY 5,000, totaling CNY 16,400. The court ordered the defendant to bear all these costs. The judgment also informed the parties that they have 15 days from service of the judgment to appeal to a higher court. This case serves as a clear reminder that loans between non-financial enterprises in China are generally invalid, and while the borrower must still return the principal, the lender cannot rely on contractual interest terms. Businesses should consult professional advisors before engaging in such transactions.
Disclaimer: This article is for informational purposes only and does not constitute legal advice.