Viewpoint | The manifestation and judicial practice of "interest deduction in advance"

Published:

2021-11-29

Reading Guidance The pre-deduction of interest in private lending is also known as "cut-off interest", "discount loan" and "tap", which means that in private lending, the lender deducts all or part of the interest from the principal in advance. It is unfair for the borrower to pay interest on the loan before using the loan, how does the law stipulate this? Is the judicial decision the result? Legal basis Article 670 of the Civil Code, interest on borrowings may not be deducted in advance from the principal. If the interest is deducted from the principal in advance, the loan shall be returned and the interest shall be calculated according to the actual amount of the loan. Article 26 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases (as amended for the second time in 2020), the amount of the loan stated in the creditor's rights documents such as IOUs, receipts and IOUs is generally recognized as principal. Where interest is deducted from the principal in advance, the people's court shall recognize the amount actually lent as principal. The ruling rule established by the Supreme Court in this regard is that if interest is deducted in advance from the principal, the amount actually lent shall be recognized as the principal and the interest shall be calculated accordingly. Related Cases Case one [Case Brief] On May 3, 2018, the defendant Li Mou offered to borrow 400000 yuan from the plaintiff due to the need of capital operation. The defendant Li Mou issued an iou to the plaintiff on the same day, which stated: "I borrowed 400,000 yuan in cash from a certain bank today, with a loan period of one year and an interest rate of 10000 yuan/month (monthly interest of 10,000 yuan only). According to this, the loan period is one year, from May 3, 2018 to May 2, 2019. Today, the borrower is Li Mou. May 3, 2018." The next day, the plaintiff transferred 400000 yuan to the defendant Li's bank account. Later, due to the need for funds raised by the defendant Li mou, he proposed to borrow another year from the plaintiff, and the plaintiff agreed. Defendant Li then stated behind the aforementioned IOU: "Voluntary extension for one year, from May 2, 2019 to May 2, 2020." On November 5, 2018, the defendant Li mou proposed to borrow 400000 yuan from the plaintiff due to the need of capital turnover. the plaintiff transferred 400000 yuan to the defendant Li mou's bank account on the same day. the defendant issued an iou to the plaintiff the next day, which stated: "today, I borrowed 400,000 yuan (400000 yuan) in cash for one year, from November 6, 2018 to November 5, 2019, with interest of 12,000 yuan per month. According to this, the borrower today: Li mou. November 6, 2018." [Summary of the Decision] This Court believes that the legitimate lending relationship between citizens is protected by law. The relationship between the original and the defendant's claims and debts is clear, and the parties shall fully perform their obligations in accordance with the agreement. For this loan on November 6, 2018. Article 200 of the the People's Republic of China Contract Law stipulates that interest on a loan may not be deducted in advance from the principal. If the interest is deducted from the principal in advance, the loan shall be returned and the interest shall be calculated according to the actual amount of the loan. In this case, the plaintiff actually provided the defendant with a loan of 400000 yuan on November 5, 2018, but the defendant Li paid the plaintiff one-month interest of 12000 yuan in advance on the same day, which was of a nature that the interest was deducted from the principal in advance. Therefore, the plaintiff actually provided the loan principal of 388000 yuan. Because the plaintiff and the defendant Li agreed that the monthly interest rate of the loan was 12000 yuan, which was actually 3%, and the defendant Li had already paid it, the plaintiff did not need to return the interest that had been paid at 3% of the monthly interest rate, and the excess should be deemed as returning the principal of the loan. Since the defendant Li Mou transferred the interest 12000 yuan to the plaintiff WeChat on December 5, 2018, which exceeded the interest 11640 yuan (388000 yuan * 3%) that he should have paid, the excess 360 yuan should be deemed as the repayment of the loan principal, that is, on December 5, 2018, the defendant Li Mou still owed the plaintiff the loan principal 387640 yuan (388000 yuan -360 yuan). For the subsequent borrowing period, the monthly excess of interest is recognized as the repayment of the principal of the loan, and so on. Case II [Brief introduction of the case] Zhang and Song are husband and wife; Tang and Ji are friends. There are a lot of economic exchanges between them and many civil lawsuits are involved. In order to purchase the 1201 room, under the introduction of Ji, Zhang and Song made a loan request to Tang. On March 26, 2019, Tang (lender, mortgagee) and Zhang and Song (Party B as co-borrower and Party C as co-mortgagee) signed the "Personal Loan Mortgage Contract". Party A provides loans to Party B for the purpose of Party B's purchase of a house. Party C knows and agrees to all the terms of the contract and signs the contract voluntarily, voluntarily mortgage the house under Zhang's name and the house to be purchased to Party A as a guarantee for Party B to repay the loan under the contract; The parties agree that the loan amount under the contract is 3500000 yuan, and the remittance handling fee shall be borne by Party B. The actual loan amount shall be subject to the debit note or bank transfer certificate. Party C shall bear the guarantee responsibility if any one of Party B signs the debit note, the above-mentioned loan of 3500000 yuan is remitted from the bank account under Tang's name. Once the transfer is successful, the above-mentioned loan is deemed to have been withdrawn and used by the borrower. The parties agree that the loan period is from March 26, 2019 to April 25, 2019. If the actual loan date does not match the date in the contract, the actual loan date shall prevail, but the total number of loan days will remain unchanged. The loan period is one period on the 10th and the cost is 1% of 1% of the loan amount; the lender's lending method is to pay by online bank transfer, the parties confirm that Party B borrowed a total of 3500000 yuan, the loan for Party B to buy a house, the borrower may not be used for other purposes. [Summary of the Referee] The "Personal Loan Mortgage Contract" signed by the lender Tang and the borrower Zhang and Song is the true intention of both parties. There is no statutory invalidity and it is legal and valid. Both parties should fully perform themselves in accordance with the agreement. Obligations. For the case of borrowing, although Tang to Zhang a transfer remittance of 3500000 yuan, but on the same day and through the season to Tang a prepaid interest of 35000 yuan, according to the the People's Republic of China Contract Law, Article 200: "the interest of the loan shall not be deducted in advance in the principal. Interest deducted in advance in the principal, should be in accordance with the actual amount of borrowing to return the loan and calculate the interest." Also according to Article 27 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases (effective since September 1, 2015): "The amount of the loan stated in the debt documents such as IOUs, receipts and IOUs shall be generally recognized as principal. Where interest is deducted from the principal in advance, the people's court shall recognize the amount actually lent as principal." Therefore, the above-mentioned 35000 yuan is beheaded interest, should be deducted from the principal of the loan, after accounting, Tang a actual loan principal of 3465000 yuan. [Comment] The lender's act of deducting all or part of the interest from the principal in advance when providing funds will not be protected by law. In judicial practice, the court calculates the interest according to the amount actually lent by the lender, and does not determine the principal of the loan simply according to the amount stated in the creditor's rights documents such as debit notes. But it is worth noting that the borrower needs to bear the burden of proof for the fact that the beheading interest was paid. form of expression In certain financial lending disputes, there are cases in which a portion of the fee is deducted in advance from the principal of the loan or the borrower is otherwise required to pay a certain fee, mostly in the name of financial advisory fees and advisory service fees. So, will financial advisory fees, advisory service fees, etc. be recognized by the people's court as beheading interest? Case three [Case Brief] Trust Company A and Company B signed the Trust Loan Contract and Debt Repayment Agreement on November 25, 2016, and signed the Financial Advisor Agreement on November 28, 2016 three days later. Trust Company A issued the first loan of 0.7205 billion yuan on November 29, 2016, and Company B paid 40665000 yuan of financial advisor fees to Trust Company A on December 1, 2016. [Summary of the Judgment] The Supreme People's Court held that the time interval between the signing of the Financial Adviser Agreement and the signing of the Trust Loan Contract involved in the case was tight, and that the loan issuance and the payment of the financial adviser's fees were crossed, showing a high degree of involvement with the Trust Loan Contract. In a dispute over a financial loan contract, if the borrower believes that the financial institution charges interest in disguise in the name of service fees, etc., and the relevant fees charged by the financial institution or the person designated by it are unreasonable, the people's court may determine whether the borrower should pay or reduce the relevant fees according to the actual situation of the service provided. In this case, when Company B claims that Trust Company A collects "beheading interest" in disguised form in the name of financial consulting fees, with reference to the provisions of the Notice of the General Office of the National Development and Reform Commission on Issuing the Enforcement Guidelines for the Charging Behavior of Commercial Banks (No. 1408 [2016] of the Development and Reform Office), Trust Company A should provide the remuneration that is consistent with 40.665 million yuan, financial advisory services with targeted, substantive and original content bear the burden of proof. According to the agreement in Article 1 of the Financial Advisory Agreement signed by both parties, Trust Company A shall provide Company B with the following financial advisory services: provide financial advisory scheme and planning and financial consultation for the financial management of Company B; Provide financial consultation, policy and regulation consultation related to industry and industry information for Company B; After Company B selects the financial advisory plan of Trust Company A, relevant work arrangements shall be made, assist Company B to complete related work. As Trust Company A failed to submit evidence to prove that it has provided financial advisory services that meet the above agreed requirements, the Court determined that the 40.665 million yuan advisory fee it collected belongs to interest collected in disguised form. According to the spirit stipulated in Article 200 of the the People's Republic of China Contract Law, it shall be deducted from the loan principal according to law. The corresponding interest, compound interest and penalty interest shall also be re-determined based on the adjusted principal. Case four [Case Brief] On July 13, 2015, Company A and Company B, Company C, Xue Mou and Qi Mou signed the "Cooperation Agreement on" Entrusted Loan of Company B "Project" Agreement stipulating that Company A shall issue entrusted loans to Company B through commercial banks, Company A shall provide consulting services for Company B, and Company B shall pay financial consulting fees, etc. July 13, 2015, September 22, 2015, November 11, 2015, August 26, 2016 B company as a borrower and a bank as a lender signed the "entrusted loan loan loan contract". Company A and Company B signed the "Financial Advisory Service Agreement" on May 4, 2015, agreeing that Company A will provide financial advisory services to Company B. The service period is from the date of signing the agreement to Company B's issuance of a "Confirmation Letter" confirming the termination of the financial advisory service and not exceeding July 31, 2015. The financial consultant fee is 8 million yuan, company B shall pay to the designated account within 5 working days from the date of the seal of the Confirmation. On July 6, 2015, Company B issued a "Confirmation Letter" to Company A, confirming that Company A has completed the financial consulting service as agreed and provided Company B with services such as financing consulting, financing planning and financing transaction structure design. The financial consulting service is terminated. At the same time, it promises to pay 8 million yuan for service to Company A within 5 days from the date of signing this Confirmation. [Summary of the Decision] Regarding the outstanding principal of the loan involved in the case. Company B claims that it and Company A have never formed an agreement on providing financial advisory services, and Company A has never provided any financial advisory services to it. 8 million yuan of the first 60 million yuan loan involved in the case was transferred to Company A on the sixth day of the loan, that is, July 23, 2015, which belongs to the beheading interest collected by Company A, according to Article 27 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, "the amount of the loan stated in the debt documents such as IOUs, receipts and IOUs is generally recognized as principal. The 8 million is equivalent to the disguised pre-deduction of interest in the principal, and the people's court shall recognize the amount actually lent as principal", and the 8 million yuan shall not be recognized as principal, so the principal of the loan still owed shall be 92 million yuan. The Supreme People's Court believes that Company A and Company B had signed the Financial Advisory Service Agreement before the loan involved in the case on May 4, 2015, and the agreement agreed on the service content and service fee of 8 million yuan. Company B then issued a "Confirmation Letter" on July 6, 2015, approving that Company A had provided financial advisory services as agreed and promising to pay 8 million yuan service fee within 5 days from the date of confirmation. On the one hand, Company B recognizes the authenticity of the Financial Advisory Service Agreement and the Confirmation Letter, and on the other hand, it has not submitted evidence to prove the claim that 8 million yuan belongs to the beheading interest. According to Article 2 of the Provisions of the Supreme People's Court on Evidence in Civil Proceedings, "the parties have the responsibility to provide evidence to prove the facts on which their claims are based or the facts on which the other party's claims are refuted. If there is no evidence or evidence is not sufficient to prove the party's claim of fact, the party with the burden of proof shall bear the adverse consequences", and Company B shall bear the legal consequences of the failure of the proof, so the defense claim that the amount of principal owed shall be deducted from the 8 million is not supported. [Comment] From the above cases, it can be seen that if the financial advisory fee is collected by the lender or the lender fails to prove that it has provided substantive services, then the financial advisory fee will be recognized as beheading interest in the judicial decision. However, it is worth noting that if the borrower does not have evidence or the evidence is not sufficient to prove its factual claim, and recognizes the authenticity of the Financial Advisory Service Agreement, etc., it will bear the legal consequences of not being able to prove it. In order to protect their rights and interests, when it comes to financial advisory fees and loan interest, the lender of funds needs to consider the following aspects: First, the contractual amount of the loan is consistent with the actual amount of the loan, to avoid inconsistencies between the two; Second, if it involves financial advisory fees, consulting fees and other related fees, a third party other than the lender may enter into a relevant service agreement with the borrower and provide real and effective advisory services; Third, it is not advisable to charge interest for a relatively short period of time (the day of lending or the next day) after lending; Fourth, lenders need to be careful to retain evidence of the provision of services such as financial advisors, such as relevant service agreements, service confirmations, etc.

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