Resolution of inter-enterprise loan contract disputes in judicial practice

On 25 September 2013, the People’s Court Daily published a speech by Xi Xiaoming, vice president of the Supreme People’s Court (SPC), entitled “Several issues concerning the application of the law to which attention needs to be paid in commercial adjudication at present”.

In that speech, concerning the issue of the determination of the validity of loan contracts, Xi said: “In commercial adjudication, it is necessary in respect of inter-enterprise loans to differentially determine the nature and validity of different lending acts. Where an enterprise does not have the qualifications to engage in finance business, but in fact engages in loan extension business and the returns from the extension of such loans is the main source of its profits, the loan contract should be found to be invalid. Where enterprises do not have the qualifications to engage in finance business and lending carried out between them on a temporary basis is for production and operational purposes, the loan contract should not be deemed invalid if financing is not the regular business of the party, providing the funds and mandatory provisions of the state on financial control are not violated in doing so.”

Beginning of change

Trial practice regarding inter-enterprise loan contract disputes began to change after the above-mentioned speech. For example, in the appeal of Zhengzhou Guangsha Property Co Ltd and Wu Shangmei v Zhengzhou Jiade Property Service Co Ltd and Li Zhenzhou loan security contract dispute, the SPC held that: “the determination in the Official Reply of the SPC on How to Handle a Situation Where, in an Inter-Enterprise Loan, the Borrower Fails to Repay the Loan on Time, that ‘where an enterprise loan contract violates relevant financial regulations, such contract is invalid’ addresses a situation where recurring inter-enterprise financing could disrupt the financial order. The court at first instance held that what in essence occurred between the two parties was a temporary inter-enterprise loan made for production and operational purposes, and was not an instance of the violation of mandatory provisions of the state on financial control. Therefore, its determination that the loan agreement is valid is not without reason and this court confirms the same.”