Perspective | "Loan Note" and "Transfer Records" in Private Lending

According to Article 679 of the Civil Code of the People's Republic of China, a loan contract between natural persons is established when the lender provides the loan. The IOU, as a written certificate, can directly prove the existence of the loan agreement and is the core evidence for determining the lending relationship. However, when there is only an IOU without a bank transfer record, the court needs to comprehensively examine the authenticity of the lending fact in conjunction with other factors, such as the amount of cash paid, the lender's financial capacity, and transaction habits.

Plaintiff's Responsibility: It is necessary to prove that the loan has been actually disbursed. If the defendant denies receiving the funds, the plaintiff should submit supplementary evidence such as withdrawal records, witness statements, and chat records to prove the rationality of the cash payment.

Defendant's Defense: If the defendant claims that the IOU is false or that the loan has been repaid, they must provide counter-evidence (such as repayment vouchers, recordings, etc.). If unable to provide evidence, the court may presume that the loan fact has been established.

Reasonableness of cash payment: Large cash payments must be reasonable, for example, whether the lender has the corresponding financial capacity, whether cash was withdrawn from a bank, etc.

Transaction background and relationship between the parties: Small loans between relatives and friends are more easily accepted, while large loans require strict scrutiny of the source and purpose of the funds.

Case Number: (2023) Min Min Zai 102 Trial Court

In the trial of private loan cases, if the borrower has objections to the authenticity of the loan, the loan relationship and its content cannot be simply determined based on IOUs and receipts. — Key points of the case of Lin Mou Neng v. Lin Mou Chuan and Liu Mou Fang on private loan disputes: In the trial of private loan cases, the lender should bear the burden of proof regarding the facts of the existence of a loan relationship and the content of the loan; the borrower should bear the burden of proof regarding the fact that the loan has been repaid. For "IOUs" or "receipts" with formal defects, the existence of a loan relationship should be determined in conjunction with other evidence. If the borrower questions the authenticity of the loan, it cannot be determined simply on the basis of IOUs, receipts, and notes. The occurrence of the loan relationship and the content of the loan relationship should be comprehensively reviewed from aspects such as the correlation between the evidence and the facts of the case, the connection between the pieces of evidence, the specific process of the formation of the loan debt, the delivery certificate, the transaction habits, the flow of funds, and the statements of the parties concerned to comprehensively judge whether there is a real loan relationship.

Bank transfer records only prove the transfer of funds, not the loan agreement.

The defendant must offer a reasonable defense regarding the nature of the transfer and provide preliminary evidence (such as transaction contracts, chat records, etc.); the plaintiff must continue to prove the loan agreement; otherwise, they may face the risk of losing the case.

(1) If a lawsuit is filed for return of a loan based only on transfer vouchers, the evidence is insufficient to prove the existence of a loan relationship, and the claim should be dismissed. — Summary of the Wang Mou v. Chen Mou private loan dispute case: Between partners, mutual transfers of funds without a loan agreement or IOU, and transfer vouchers without notes on purpose or situation descriptions, where one party claims it is a loan and the other claims it is a transfer for handling partnership affairs, this is insufficient to prove the existence of a loan relationship, and the People's Court will not support it. (Trial Court: Linyi Intermediate People's Court, Shandong Province; Case Source: People's Court Daily, November 15, 2023, page 3)

(2) A loan relationship cannot be established based solely on transfer vouchers — Summary of the Liu Mou v. Zhou Mou private loan dispute case: In private loan disputes, a loan relationship cannot be established based solely on transfer vouchers. The establishment of a loan relationship also requires supporting evidence that both parties have formed a loan agreement. (Case Source: Hunan High People's Court website)

(3) In a dispute arising from a private loan, one party sues and claims the existence of a loan and demands repayment from the other party, but the loan agreement and the process, interest, and term of the loan are unclear, and there is no IOU; if a complete chain of evidence is not formed, the People's Court will not support it — Summary of the Zheng Mou Mei v. Zheng Mou Quan private loan dispute case: When a dispute arises between parties due to a private loan, and one party sues claiming the existence of a loan and demands repayment from the other party, but the loan agreement and the process, interest, and term of the loan are unclear, and there is no IOU, and a complete chain of evidence is not formed, this is insufficient evidence, and the People's Court will not support it. (Trial Court: Fuzhou Intermediate People's Court, Fujian Province; Case Source: Typical Cases of Fujian Courts Supporting Epidemic Prevention and Control)

(4) If the defendant argues that the transfer is in repayment of previous loans or other debts between the parties, and proves this claim, the other party must still bear the burden of proving the establishment of the loan relationship — Summary of the Zhang Mou Mou v. Liu Mou Mou private loan dispute case: If one party files a private loan lawsuit based only on financial institution transfer vouchers, and the other party argues that the transfer is for other reasons, the defendant should provide evidence to prove their claim. After providing corresponding evidence to prove their claim, the other party must still bear the burden of proving the establishment of the loan relationship. (Trial Court: Pinggu District People's Court, Beijing; Case Source: China Court Website)

(5) If the plaintiff files a private loan lawsuit based only on the transfer vouchers of a financial institution, and the defendant argues that the transfer was for other reasons and provides evidence to prove it, the plaintiff must still bear the burden of proving the establishment of the loan relationship — Summary of the Tong Mou v. Mou Yi Hair Salon private loan dispute case: If the plaintiff files a private loan lawsuit based only on the transfer vouchers of a financial institution, and the defendant argues that the transfer was for other reasons, the defendant should provide evidence to prove their claim. After the defendant provides corresponding evidence to prove their claim, the plaintiff must still bear the burden of proving the establishment of the loan relationship; if the court cannot determine the establishment of the loan relationship based on the evidence provided by the plaintiff, the plaintiff's claim should be dismissed. (Case Source: Jiangsu Court Website)

When the plaintiff brings a lawsuit for civil lending based on debt certificates such as promissory notes, receipts, and IOUs, and the defendant denies the fact of lending, the People's Court, in addition to relying on the debt certificates provided by the parties, should also comprehensively examine the following facts and factors to make a comprehensive judgment on whether the plaintiff's claim of lending actually occurred.

In a loan relationship, the loan amount is undoubtedly an important fact of the case, and it will also directly affect the transaction arrangements between the parties, including the method of payment. Generally, people tend to take different levels of caution when dealing with different loan amounts. When the loan amount is small, the payment methods are more diverse and arbitrary. When trying such cases, if the lender claims that the loan was paid in cash, it is usually possible to verify the facts by examining the authenticity, relevance, and legality of the debt certificates such as promissory notes. In the absence of contradictory evidence, the fact of the loan can be confirmed. However, for large loan amounts, both lenders and borrowers generally adopt a more cautious attitude towards fund transfers. For large loans, the People's Court should usually comprehensively examine and determine the loan contract, promissory notes, bank fund transfer evidence, and corporate accounting materials. For large loans that the lender claims were paid in cash, if the lender cannot provide other evidence besides debt certificates such as promissory notes to prove that the loan has been actually paid, further investigation into the lender's financial situation, the relationship between the borrower and the lender, and transaction habits should be conducted to determine the validity of the parties' claims. In addition, the loan amount is correlated to varying degrees with the relationship between the parties, the economic capacity of the parties, and the source and purpose of the loan. Clarifying the loan amount itself is not only necessary for correctly handling the principal of the loan in civil lending cases but is also a necessary step to further determine, in conjunction with other facts, whether the loan relationship actually occurred.

As mentioned earlier, in civil loan relationships, especially loan relationships between natural persons, the actual transfer of funds is essential for the validity of the loan contract, and therefore a fact that must be ascertained when trying such cases. The clarification of the fact of the payment of funds generally includes multiple aspects such as the method, time, location, payer, and recipient of the payment. The method of payment mainly refers to whether the funds were actually paid through bank transfer, payment by bill, or cash payment. The method of payment for the loan often has a strong connection with the loan amount. For small loans, it is more common to use cash transactions. Large loans, due to involving huge cash transfers, are relatively rare even though China's financial cash control is still lagging behind developed countries, with high frequency and wide use of cash. In judicial practice, lenders who find it difficult to prove actual payment often claim that the transaction was conducted in cash to avoid proving that the funds have been actually paid. This should be treated cautiously. For funds paid through a third-party system such as a bank, it is usually relatively easy to obtain payment vouchers from the third party, so it is not difficult to ascertain factors such as the time and location of the payment. For loans that the lender claims were paid in cash, further scrutiny and confirmation should be given to payment details such as the time, location, payer, and recipient to ascertain the facts of the fund payment.

Examining the economic capacity of the parties mainly involves examining the financial situation and source of funds of the lender. The financial situation and purpose of the loan of the borrower can also be examined in conjunction with the specific circumstances of the case to better ascertain the facts of the case and form an inner conviction on whether the loan actually occurred. From the perspective of commercial transactions, the source of funds lent by the lender and the purpose of the loan borrowed by the borrower do not affect whether the loan contract is established or valid, nor can they be a legitimate defense for the borrower to fail to repay the debt as agreed. Therefore, some believe that when trying civil loan disputes, the People's Court has no need or reason to examine the economic capacity of the parties, including the source and purpose of the funds. However, some also believe that this view is generally appropriate, but when the parties dispute the actual occurrence of the loan relationship, or when the parties have no dispute over the loan fact, but after trial, the People's Court believes that, according to Article 19 of the Provisions, it may involve false litigation, then it is necessary to examine the economic capacity and property changes of the parties to make a comprehensive judgment on whether the transaction actually occurred.

From an interpretative perspective, transaction habits play a crucial role in contract interpretation and fact-finding. If the parties have a dispute over the interpretation of a contract clause, the true meaning of the clause should be determined according to the wording used in the contract, the relevant clauses of the contract, the purpose of the contract, the trading habits, and the principle of good faith. The reason why trading habits are considered in contract interpretation is because the behavior of trading entities is usually governed by habits. Sometimes, the reason why the parties do not make clear provisions in the contract is that both parties believe that the established trading habits naturally belong to the content of the contract and need not be explicitly stated. This practice of supplementing incomplete contract provisions with trading habits and clarifying ambiguous contract provisions with trading habits is also adopted by the laws and international conventions of many countries in comparative law. This provision draws on this legal provision and considers the characteristics of civil loan transactions, stipulating that trading habits are factors that the People's Court should consider when comprehensively determining the facts of a loan. In cases where there is a long-term cooperative relationship between the parties or a certain trading habit exists in a region or industry, these existing transaction methods and habits can be used to corroborate the authenticity of the disputed transaction.

In practice, a considerable number of civil loans occur between acquaintances. Due to close relationships, out of trust or for the sake of face, loan contracts are concluded orally, and the parties do not keep written evidence at the beginning of the transaction, or due to limitations in legal awareness, the written evidence such as loan contracts and promissory notes is not standardized. For example, some promissory notes do not have the borrower's name or the borrower's name is written as an alias; some have unclear or illegal interest rate provisions; some do not have the loan time, purpose, or inconsistencies between the Chinese and Arabic numerals of the amount. In the actual borrowing and repayment process, it often happens that the borrower claims to have repaid the loan but has not recovered the promissory note, and the lender has not issued a receipt. In situations where there is insufficient written evidence or the determination of the facts of the case based solely on written evidence deviates from the truth, the introduction of trading habits, combined with the specific facts of the case, helps judges discern the facts of the case from specific facts. It should be noted that the parties need to provide sufficient evidence to prove the trading habits they claim. On the one hand, they need to prove that such trading habits actually exist, and on the other hand, these habits should be jointly recognized and followed by both parties. Due to the diversity of trading habits, when determining and applying them, particular attention should be paid to the principles of publicity, public recognition, and legality. Except for special trading habits reached between the parties, for trading habits on a larger scale, they should generally be repeatedly and stably present in a certain region or industry, with common knowledge and recognition among the transaction entities in the region or industry, in order to be considered as trading habits, and the use of trading habits should be based on the absence of contradictory evidence.

The characteristics of private lending transactions determine that many loans involve intermediaries for introductions, recommendations, guarantees, or witnessing. Therefore, when reviewing private lending cases, witness testimony is often important evidence for proving the facts of the case and should be given due attention and careful review. It should be clarified that when reviewing witness testimony, the people's courts should strictly follow the provisions of relevant laws and judicial interpretations such as the Code of Civil Procedure. This is especially true for cases with weak objective evidence, where it is crucial to carefully discern the authenticity and legality of witness testimony, avoiding false testimony provided by witnesses and parties due to conflicts of interest, which could lead to incorrect factual findings. When determining the validity of witness testimony, methods such as confrontation can be flexibly used to better ascertain the facts of the case.

In addition to witness testimony, in the trial of private lending cases, the people's courts should also give due consideration to the statements of the borrowers and lenders themselves or their agents. As direct participants in the transaction, the parties involved or their agents should be able to provide a complete and clear account of the reasons for the loan, the time and place of payment, the source of funds, and the purpose of the loan. Requiring them to appear in court for questioning by the court and cross-examination by the parties usually helps to ascertain the facts of the case.

In the trial of specific cases, it is necessary to prevent parties from using the legal form of private lending to conceal illegal transactions behind debt instruments. Considering the local economic development level, the economic status, payment ability, and transaction habits of the parties in individual cases, the authenticity of loan contracts and debt instruments should be reviewed. The relevance of each piece of evidence to the facts of the case and the relevant facts of the loan content should also be reviewed. At the same time, the principles of voluntariness, fairness, equivalent exchange, and good faith in civil activities should be upheld, respecting the parties' disposal of their civil rights and avoiding excessively thorough scrutiny of the facts related to the loan, or even excessive intervention and interference with the parties' freedom of transaction through judicial means. (Excerpt from the Supreme People's Court Civil Trial First Division's compilation: "Understanding and Application of the Supreme People's Court's New Judicial Interpretation on Private Lending," People's Court Press, 2021 edition, pp. 255-258)