Point of View... The determination of whether the overdue penalty interest can be charged compound interest and the rules of judicial application.
Published:
2023-03-12
Introduction Penalty interest and compound interest are two professional terms with different meanings in the financial industry. They cannot be included in each other, let alone confused. As to whether financial institutions can claim compound interest on penalty interest, looking at the current relevant laws and regulations, there is no clear stipulation that "compound interest should be calculated for overdue penalty interest", but in judicial precedents, we find that in some cases, it can be supported by the court to claim compound interest for overdue penalty interest. Therefore, this paper will combine the relevant jurisprudence of the Supreme Court to sort out the decision on whether the overdue penalty interest can be calculated and compound interest, with a view to providing some ideas and guidance for the handling of similar situations in the future. The concept of 1. penalty interest and compound interest. The concept of (I) penalty interest. According to Article 25 of the "Regulations on the Administration of RMB Interest Rates" (Yinfa [1999] No. 77) issued by the People's Bank of China (hereinafter referred to as the "Regulations on the Administration of RMB Interest Rates"), overdue loans or misappropriation of loans shall be overdue or From the date of misappropriation, penalty interest shall be charged at the penalty interest rate until the principal and interest are paid off, and the penalty interest rate shall be adjusted in sections. Thus, the penalty interest is due to the borrower overdue repayment or misappropriation of the principal of the loan, by the lender to the borrower to collect punitive interest, penalty interest is mainly divided into the loan overdue penalty interest and loan misappropriation after the penalty interest two categories, this paper mainly discusses the type of penalty interest is overdue penalty interest. The calculation basis of the penalty interest comes from the agreement of the loan contract. With reference to Article 3 of the Notice of the People's Bank of China on Issues Related to RMB Loan Interest Rate (hereinafter referred to as the "Notice of Loan Interest Rate"), the penalty interest rate for overdue loans (loans that the borrower fails to repay on the date agreed in the contract) is changed from the current interest rate of 2.1 per 10,000 per day to an additional 30%-50% on the loan interest rate stated in the loan interest rate level; the penalty interest rate at which the borrower fails to use the loan for the purpose agreed in the contract has been changed from the current five-tenths-of-a-day interest rate to an additional 50-100 per cent on the level of the loan interest rate stated in the loan contract. For loans that are overdue or not used for the purpose agreed upon in the contract, interest shall be charged at the penalty interest rate from the date on which the loan is overdue or not used for the purpose agreed upon in the contract until the principal and interest are paid off. Interest that cannot be paid on time is compounded at the penalty rate. Concepts related to (II) compound interest According to Articles 20 and 21 of the "Regulations on the Administration of RMB Interest Rates", the compound interest involved in financial claims refers to "interest on interest". Specifically, the compound interest on loans refers to the interest generated by the unpaid interest on loans. It is a method of interest calculation. In addition to the interest generated by the principal, the interest generated by the principal is also calculated as interest, which is liquidated damages in nature. The basis for the calculation of compound interest is also derived from the agreement of the loan contract, and according to Article 3 of the Loan Interest Rate Notice: "For interest that cannot be paid on time, compound interest shall be charged at the penalty interest rate.", Thus, if it is during the term of the loan, compound interest is charged at the normal loan rate, and if it is after the expiration of the loan, compound interest is charged at the penalty rate. 2. Disputes over Whether Overdue Penalty Interest Can Be Compensated As mentioned earlier, compound interest is interest on the unpaid interest payable, so can compound interest still be charged for overdue penalty interest? One view is that compound interest is a punitive measure for the borrower's default interest and penalty interest, and its calculation base can include the default interest and penalty interest. However, another view is that the penalty interest already reflects the penalty for default interest, compound interest can only be calculated on the basis of interest, can not be added to the overdue penalty interest. (I) affirms that late penalties can be compounded. 1. [Case 1] (2020) Civil Judgment No. 374 of the Supreme Court The Supreme Court held that both the Liquidity Loan Contract and the Fixed Assets Loan Contract involved in the case stipulate that "the lender has the right to charge the overdue penalty interest according to the actual overdue days from the overdue date of the overdue date until the borrower pays off the principal of the loan due at maturity (the term" maturity "in this contract includes the situation where the lender announces the premature maturity of the loan)", "The interest (including normal interest, overdue penalty interest and misappropriation penalty interest) that the lender fails to pay on time shall, from the date of expiration, be compounded according to the actual number of days overdue at the overdue penalty interest rate agreed in this contract". The Regulations on the Administration of RMB Interest Rates and the Notice of the People's Bank of China on Issues Related to RMB Loan Interest Rates do not restrict banks and other financial institutions from calculating compound interest on penalties. The above agreements do not violate the mandatory provisions of laws and administrative regulations. It should be determined that Zhenghua Company and Shanghai Pudong Development Bank Guiyang Branch and Shanghai Pudong Development Bank Bijie Branch have reached an agreement on the liability for breach of contract when the loan is overdue, that is, a penalty interest is charged on the outstanding principal payable, and a compound interest is charged on the interest, including the penalty interest. 2. [Case 2] (2019) Supreme Court Civil Judgment No. 840 The Supreme Court held that the agreement in the Liquidity Loan Contract on the interest that cannot be paid on time and the penalty interest in accordance with the penalty interest rate standard to collect compound interest is the agreement of the parties and the agreement is the true intention of the parties and does not violate the law. At the same time, the debtor has not proved that the total amount of interest calculated according to the contractual method of calculating interest, penalty interest and compound interest exceeds the amount calculated according to the standard of 24% annual interest rate based on the principal amount owed, so there is no problem of excessive. Compound interest shall be calculated on the basis of unpaid interest payable and the aforementioned unpaid penalty interest payable from March 21, 2015 in accordance with the penalty interest rate standard agreed in Article 4 of the Liquidity Loan Contract until the date of full settlement of the principal and interest of this loan. (II) negative said: overdue penalty interest can not be calculated compound interest 1. [Case 1] (2019) Civil Judgment No. 1990 of the Supreme Court The Supreme Court believes that, in accordance with the relevant provisions of the People's Bank of China's Regulations on the Administration of RMB Interest Rates and the Notice on Issues Related to RMB Loan Interest Rates, the calculation base of compound interest should only be normal interest, that is, interest payable during the contract period, excluding overdue penalty interest. The Loan Contract does not explicitly agree on the calculation of compound interest on penalties and the quarterly settlement of penalties and compound interest outside the performance of the contract, so the Court does not support the above proposition. 2. [Case 2], (2020) Civil Judgment No. 145 of the Supreme Court The Supreme Court held that Article 4.4 of the "Trust Loan Contract" signed by the Foreign Economic and Trade Trust Company (Party A) and Hengfeng Silk and Satin Company (Party B) stipulates: "Party B fails to use the loan as agreed in the contract, and for the part that is not used as agreed in the contract, the interest shall be calculated at 100 on the basis of the original interest rate from the date of change of use. If Party B fails to repay the loan on time, the outstanding part of the loan shall be charged at 50% interest on the basis of the original interest rate from the date of overdue. Interest that is not paid on time is compounded at the aforementioned penalty rate. The original interest rate is the interest rate applicable before the maturity date of the loan (including the early maturity date). If the loan is both overdue and not used for the purpose agreed upon in the contract, interest is charged at the higher of the above provisions." As Hengfeng Silk Company failed to repay the loan and pay the interest on schedule, the Foreign Economic and Trade Trust Company requested to collect the penalty interest from July 3, 2017 (based on the principal of the loan in arrears of 90 million yuan, calculated at the annual interest rate of 11.325 to the date of payment) and compound interest from July 21, 2016 (based on the interest in arrears, calculated at the annual interest rate of 11.325 to the date of payment) according to the above-mentioned contract, it has been supported by the court of first instance, and its current claim that the penalty interest on the loan involved in the case should also be compounded. There is no clear contract basis. The first instance judgment is not supported and it is not improper, and the court maintains it. " 3. of Judges Meeting Opinion on Whether Late Penalty Interest Can Be Compound On both of these views, the judge's opinion in the minutes of the 20th judges' meeting of the Second Circuit Court of the Supreme People's Court in 2021 adopted the affirmative statement that penalty interest and compound interest are usually only applicable to financial lending. In financial lending, the interest during the loan period can be calculated as compound interest when there is no doubt that compound interest is calculated on the basis of the interest owed on the settlement date multiplied by the corresponding interest rate, so the calculation of compound interest is closely related to the settlement date. Penalty interest charged after the loan is overdue, because there is no interest settlement date problem, so in general there is no penalty interest calculation compound interest problem. Of course, if the loan contract has a clear agreement on the overdue interest settlement date and the collection of overdue penalty interest, there may also be the problem of penalty interest collection compound interest. In view of the fact that the current law does not prohibit the collection of compound interest on penalties, in accordance with the principle of autonomy, the parties should be allowed to make such transaction arrangements, but not exceed the statutory interest rate ceiling. Considering that a financial lending contract is usually a form contract drawn up in advance by one of the financial institutions, it is up to the financial institution to prove that it has fulfilled its obligation to prompt and explain the existence of a clause on whether the penalty interest should be and how to calculate compound interest. Advice from 4. lawyers Financial institutions need to make clear agreements on the terms of the loan contract, and cannot violate the mandatory provisions of relevant laws and administrative regulations. In particular, loan interest, late penalty interest, misappropriation penalty interest and compound interest in the loan contract need to be clearly stated to ensure that the terms can be clearly distinguished and clearly prompted. The agreement of the loan contract for the calculation of compound interest on penalties and interest cannot be claimed as the content of overdue interest, such as "interest that cannot be paid on time", "interest payable for unpaid interest" and other interest expressions with different understandings, otherwise it will bear the adverse consequences of being the provider of the format clause.
Introduction
Penalty interest and compound interest are two professional terms with different meanings in the financial industry. They cannot be included in each other, let alone confused. As to whether financial institutions can claim compound interest on penalty interest, looking at the current relevant laws and regulations, there is no clear stipulation that "compound interest should be calculated for overdue penalty interest", but in judicial precedents, we find that in some cases, it can be supported by the court to claim compound interest for overdue penalty interest. Therefore, this paper will combine the relevant jurisprudence of the Supreme Court to sort out the decision on whether the overdue penalty interest can be calculated and compound interest, with a view to providing some ideas and guidance for the handling of similar situations in the future.
The concept of 1. penalty interest and compound interest.
The concept of (I) penalty interest.
According to Article 25 of the "Regulations on the Administration of RMB Interest Rates" (Yinfa [1999] No. 77) issued by the People's Bank of China (hereinafter referred to as the "Regulations on the Administration of RMB Interest Rates"), overdue loans or misappropriation of loans shall be overdue or From the date of misappropriation, penalty interest shall be charged at the penalty interest rate until the principal and interest are paid off, and the penalty interest rate shall be adjusted in sections. Thus, the penalty interest is due to the borrower overdue repayment or misappropriation of the principal of the loan, by the lender to the borrower to collect punitive interest, penalty interest is mainly divided into the loan overdue penalty interest and loan misappropriation after the penalty interest two categories, this paper mainly discusses the type of penalty interest is overdue penalty interest.
The calculation basis of the penalty interest comes from the agreement of the loan contract. With reference to Article 3 of the Notice of the People's Bank of China on Issues Related to RMB Loan Interest Rate (hereinafter referred to as the "Notice of Loan Interest Rate"), the penalty interest rate for overdue loans (loans that the borrower fails to repay on the date agreed in the contract) is changed from the current interest rate of 2.1 per 10,000 per day to an additional 30%-50% on the loan interest rate stated in the loan interest rate level; the penalty interest rate at which the borrower fails to use the loan for the purpose agreed in the contract has been changed from the current five-tenths-of-a-day interest rate to an additional 50-100 per cent on the level of the loan interest rate stated in the loan contract. For loans that are overdue or not used for the purpose agreed upon in the contract, interest shall be charged at the penalty interest rate from the date on which the loan is overdue or not used for the purpose agreed upon in the contract until the principal and interest are paid off. Interest that cannot be paid on time is compounded at the penalty rate.
Concepts related to (II) compound interest
According to Articles 20 and 21 of the "Regulations on the Administration of RMB Interest Rates", the compound interest involved in financial claims refers to "interest on interest". Specifically, the compound interest on loans refers to the interest generated by the unpaid interest on loans. It is a method of interest calculation. In addition to the interest generated by the principal, the interest generated by the principal is also calculated as interest, which is liquidated damages in nature.
The basis for the calculation of compound interest is also derived from the agreement of the loan contract, and according to Article 3 of the Loan Interest Rate Notice: "For interest that cannot be paid on time, compound interest shall be charged at the penalty interest rate.", Thus, if it is during the term of the loan, compound interest is charged at the normal loan rate, and if it is after the expiration of the loan, compound interest is charged at the penalty rate.
2. Disputes over Whether Overdue Penalty Interest Can Be Compensated
As mentioned earlier, compound interest is interest on the unpaid interest payable, so can compound interest still be charged for overdue penalty interest? One view is that compound interest is a punitive measure for the borrower's default interest and penalty interest, and its calculation base can include the default interest and penalty interest. However, another view is that the penalty interest already reflects the penalty for default interest, compound interest can only be calculated on the basis of interest, can not be added to the overdue penalty interest.
(I) affirms that late penalties can be compounded.
1. [Case 1] (2020) Civil Judgment No. 374 of the Supreme Court
The Supreme Court held that both the Liquidity Loan Contract and the Fixed Assets Loan Contract involved in the case stipulate that "the lender has the right to charge the overdue penalty interest according to the actual overdue days from the overdue date of the overdue date until the borrower pays off the principal of the loan due at maturity (the term" maturity "in this contract includes the situation where the lender announces the premature maturity of the loan)", "The interest (including normal interest, overdue penalty interest and misappropriation penalty interest) that the lender fails to pay on time shall, from the date of expiration, be compounded according to the actual number of days overdue at the overdue penalty interest rate agreed in this contract". The Regulations on the Administration of RMB Interest Rates and the Notice of the People's Bank of China on Issues Related to RMB Loan Interest Rates do not restrict banks and other financial institutions from calculating compound interest on penalties. The above agreements do not violate the mandatory provisions of laws and administrative regulations. It should be determined that Zhenghua Company and Shanghai Pudong Development Bank Guiyang Branch and Shanghai Pudong Development Bank Bijie Branch have reached an agreement on the liability for breach of contract when the loan is overdue, that is, a penalty interest is charged on the outstanding principal payable, and a compound interest is charged on the interest, including the penalty interest.
2. [Case 2] (2019) Supreme Court Civil Judgment No. 840
The Supreme Court held that the agreement in the Liquidity Loan Contract on the interest that cannot be paid on time and the penalty interest in accordance with the penalty interest rate standard to collect compound interest is the agreement of the parties and the agreement is the true intention of the parties and does not violate the law. At the same time, the debtor has not proved that the total amount of interest calculated according to the contractual method of calculating interest, penalty interest and compound interest exceeds the amount calculated according to the standard of 24% annual interest rate based on the principal amount owed, so there is no problem of excessive. Compound interest shall be calculated on the basis of unpaid interest payable and the aforementioned unpaid penalty interest payable from March 21, 2015 in accordance with the penalty interest rate standard agreed in Article 4 of the Liquidity Loan Contract until the date of full settlement of the principal and interest of this loan.
(II) negative said: overdue penalty interest can not be calculated compound interest
1. [Case 1] (2019) Civil Judgment No. 1990 of the Supreme Court
The Supreme Court believes that, in accordance with the relevant provisions of the People's Bank of China's Regulations on the Administration of RMB Interest Rates and the Notice on Issues Related to RMB Loan Interest Rates, the calculation base of compound interest should only be normal interest, that is, interest payable during the contract period, excluding overdue penalty interest. The Loan Contract does not explicitly agree on the calculation of compound interest on penalties and the quarterly settlement of penalties and compound interest outside the performance of the contract, so the Court does not support the above proposition.
2. [Case 2], (2020) Civil Judgment No. 145 of the Supreme Court
The Supreme Court held that Article 4.4 of the "Trust Loan Contract" signed by the Foreign Economic and Trade Trust Company (Party A) and Hengfeng Silk and Satin Company (Party B) stipulates: "Party B fails to use the loan as agreed in the contract, and for the part that is not used as agreed in the contract, the interest shall be calculated at 100 on the basis of the original interest rate from the date of change of use. If Party B fails to repay the loan on time, the outstanding part of the loan shall be charged at 50% interest on the basis of the original interest rate from the date of overdue. Interest that is not paid on time is compounded at the aforementioned penalty rate. The original interest rate is the interest rate applicable before the maturity date of the loan (including the early maturity date). If the loan is both overdue and not used for the purpose agreed upon in the contract, interest is charged at the higher of the above provisions." As Hengfeng Silk Company failed to repay the loan and pay the interest on schedule, the Foreign Economic and Trade Trust Company requested to collect the penalty interest from July 3, 2017 (based on the principal of the loan in arrears of 90 million yuan, calculated at the annual interest rate of 11.325 to the date of payment) and compound interest from July 21, 2016 (based on the interest in arrears, calculated at the annual interest rate of 11.325 to the date of payment) according to the above-mentioned contract, it has been supported by the court of first instance, and its current claim that the penalty interest on the loan involved in the case should also be compounded. There is no clear contract basis. The first instance judgment is not supported and it is not improper, and the court maintains it."
3. of Judges Meeting Opinion on Whether Late Penalty Interest Can Be Compound
On both of these views, the judge's opinion in the minutes of the 20th judges' meeting of the Second Circuit Court of the Supreme People's Court in 2021 adopted the affirmative statement that penalty interest and compound interest are usually only applicable to financial lending. In financial lending, the interest during the loan period can be calculated as compound interest when there is no doubt that compound interest is calculated on the basis of the interest owed on the settlement date multiplied by the corresponding interest rate, so the calculation of compound interest is closely related to the settlement date. Penalty interest charged after the loan is overdue, because there is no interest settlement date problem, so in general there is no penalty interest calculation compound interest problem. Of course, if the loan contract has a clear agreement on the overdue interest settlement date and the collection of overdue penalty interest, there may also be the problem of penalty interest collection compound interest. In view of the fact that the current law does not prohibit the collection of compound interest on penalties, in accordance with the principle of autonomy, the parties should be allowed to make such transaction arrangements, but not exceed the statutory interest rate ceiling. Considering that a financial lending contract is usually a form contract drawn up in advance by one of the financial institutions, it is up to the financial institution to prove that it has fulfilled its obligation to prompt and explain the existence of a clause on whether the penalty interest should be and how to calculate compound interest.
Advice from 4. lawyers
Financial institutions need to make clear agreements on the terms of the loan contract, and cannot violate the mandatory provisions of relevant laws and administrative regulations. In particular, loan interest, late penalty interest, misappropriation penalty interest and compound interest in the loan contract need to be clearly stated to ensure that the terms can be clearly distinguished and clearly prompted. The agreement of the loan contract for the calculation of compound interest on penalties and interest cannot be claimed as the content of overdue interest, such as "interest that cannot be paid on time", "interest payable for unpaid interest" and other interest expressions with different understandings, otherwise it will bear the adverse consequences of being the provider of the format clause.
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