Perspective | An Analysis of the Legal Consequences of Private Bill Discounting from the Perspective of Criminal and Civil Liability

The rights enjoyed by the bill holder specifically include the right to request payment, the right of recourse on the bill, the right of further recourse, and the right to request the return of benefits. Besides proving the continuity of bill endorsements, the bill rights holder must also have a genuine transaction relationship and creditor-debtor relationship as stipulated in Article 10 of the "Negotiable Instruments Law." This article discusses private bill discounting without a genuine transaction relationship, the rights the bill holder can claim, and the corresponding risks they face.

Currently, judicial practice has established a unified standard that private bill discounting is an invalid civil legal act, and it stipulates that "if the parties cannot return the bill, the original legitimate bill holder may refuse to return the discount funds." Since the discounter in private bill discounting is not a legitimate bill holder, they do not enjoy the right of recourse on the bill if payment is refused upon maturity. However, they can file a dispute to confirm the contract's invalidity against the party selling the bill in private discounting, claim the invalidity of the bill sale, and demand the return of the purchase price along with corresponding interest.

Legal Provisions: Article 157 of the Civil Code of the People's Republic of China: After a civil legal act is declared invalid, revoked, or determined to have no effect, the property obtained by the actor through such act shall be returned; if it cannot be returned or there is no need to return it, compensation shall be made in lieu. The party at fault shall compensate the other party for the losses suffered; if both parties are at fault, they shall bear corresponding responsibilities respectively. If otherwise provided by law, such provisions shall prevail.

On November 8, 2019, the Supreme People's Court issued the "Summary of the National Court Civil and Commercial Trial Work Conference," which stipulates the legal consequences of private bill discounting: "Bill discounting is a state-licensed business. If a legitimate bill holder discounts to a party without statutory discount qualifications, such act shall be deemed invalid, and the discount funds and the bill shall be returned to each other. If the parties cannot return the bill, the original legitimate bill holder may refuse to return the discount funds. During the trial of civil and commercial cases, if the people's court finds that a party without statutory qualifications is engaged in 'discounting' as a business, since such behavior may constitute a crime, relevant materials shall be transferred to the public security authorities. If the trial of civil and commercial cases must rely on the results of related criminal cases, the litigation shall be suspended and resumed after the criminal case is concluded. If the basic facts of the case do not require relying on the results of related criminal cases, the people's court shall continue the trial. According to the principle of the independence of negotiable instruments from underlying causes, when a legitimate bill holder discounts to a subject without discount qualifications, and the discounter pays the discount funds and directly delivers the bill to a subsequent holder, who pays the consideration and records themselves as the endorsee, then endorses and transfers the bill based on a genuine transaction and creditor-debtor relationship, the final holder shall be recognized as the legitimate bill holder.

The court held that China's bills operate under relative independence rather than absolute independence. In this case, Lecheng Company, as the bill rights holder, exercising the right of recourse, must not only prove that the bill it holds is valid and the endorsements are continuous but also prove the legality of acquiring the bill rights, i.e., there is a genuine transaction or creditor-debtor relationship with its immediate predecessor. The evidence submitted by Lecheng Company, such as the "Monitoring Installation Contract" and payment receipts, is insufficient to prove a genuine and effective transaction relationship with its immediate predecessor, Dongying Fengneng Economic and Trade Co., Ltd. (hereinafter Fengneng Company). Moreover, Lecheng Company and Jinyuan Cultural and Sports Center have been involved in multiple similar disputes over bill recourse, and the basic transaction contracts between Lecheng Company and Fengneng Company are basically the same, with projects mostly in remote locations and large amounts, not excluding the possibility of private discounting between Lecheng Company and its predecessor Fengneng Company. Therefore, the original court's dismissal of Lecheng Company's claim due to doubts about the transaction relationship between Lecheng Company and Fengneng Company was appropriate.

This case arose because the "Monitoring Installation Contract" submitted by the bill holder was signed before Fengneng Company's establishment, and due to doubts about the bill holder's genuine transaction, the court did not recognize the bill holder's right of recourse.

The court held that Wang Mouhua only paid Xiang Moudong cash of 888,750 yuan, and the deducted part should be recognized as discount interest. The transfer of the bank acceptance bill between Wang Mouhua and Xiang Moudong should be recognized as private discounting; bill discounting is a state-licensed business, and the act of a legitimate bill holder discounting to a party without statutory discount qualifications shall be deemed invalid; Wang Mouhua is a natural person without discount qualifications, so the private discounting between Wang Mouhua and Xiang Moudong violates mandatory legal and administrative regulations and is invalid. Since the private discounting between Wang Mouhua and Xiang Moudong is invalid, the discount funds and the bill shall be returned to each other; as the bill involved was forged and confiscated by Ningxia Bank Dawukou Branch, Wang Mouhua has no obligation to return the bill; Wang Mouhua's claim for interest is unsupported by law and is not upheld by this court.

Regarding the circumstances under which the parties cannot return the bill as stipulated in the above-mentioned Ninth Civil Meeting Minutes, where the original lawful holder may refuse to return the discounted funds, this article believes it is necessary to distinguish the reasons why the parties cannot return the bill and the status of the bill rights. Bills are rights-established securities and literal securities. Within six months after the bill is refused payment, the debtors are the drawer, acceptor, and all previous endorsers (excluding entrusted, pledged, and non-transferable endorsements). If it exceeds six months, the rights against all previous endorsers are extinguished. If the bill is returned in the case of private discounting at this time, the debtor parties will be limited to the drawer and acceptor. If the bill has exceeded the two-year statute of limitations, only the right to return the bill benefits remains, with the debtor parties being only the drawer or acceptor, and the debt amount no longer includes interest. In this case, it should be regarded as the bill objectively cannot be returned as stipulated in the Ninth Civil Meeting Minutes. According to Article 157 of the Civil Code of the People's Republic of China, losses should be shared according to the fault liability ratio of private bill discounting.

However, in the case of private bill discounting, it often occurs that the obligor of the refund of the purchase price Electronic Bill System Bills that have matured and are "locked" cannot be transferred, so the issue of refusing to return the purchase price on the grounds that the bill cannot be objectively returned to its original state or that the bill has circulated to a third party and thus cannot be objectively returned to its original state, this article believes that the rules of bill issuance, delivery, presentation for payment, and refusal of payment established by the electronic bill system should still comply with the principles of the Negotiable Instruments Law and related legal norms. If the electronic bill system is incompatible with the Negotiable Instruments Law, legal provisions shall prevail, and it cannot be determined whether the bill can be returned simply because the electronic bill system has locked the matured bill.

This court holds that bill discounting is a state-licensed business. If a lawful holder discounts to a party without statutory discount qualifications, such behavior is invalid, and the discount funds and bills should be returned to each other. Article 58 of the Contract Law of the People's Republic of China stipulates: "If a contract is invalid or rescinded, the property obtained under the contract shall be returned; if it cannot be returned or there is no need to return, compensation shall be made at the equivalent value. The party at fault shall compensate the other party for the losses suffered; if both parties are at fault, they shall bear the corresponding responsibilities respectively." In this case, Ding and Wang have no dispute over the nature of the disputed amount as the difference in private bill discounting. Ding sued for 8.52 million yuan. According to the facts ascertained by the original trial, Wang returned 520,000 yuan on June 20, 2014. Accordingly, the second-instance judgment held that due to the invalidity of the civil legal relationship involved, Wang should return 8 million yuan to Ding. Regarding compensation for actual losses, from February 20, 2014, to June 20, 2014, the base amount is 8.52 million yuan; from June 21, 2014, to September 19, 2019, the base amount is 8 million yuan, calculated according to the loan interest rate published by the People's Bank of China for the same period; from August 20, 2019, to the actual payment date, the base amount is 8 million yuan, calculated according to the national interbank offered rate. Market Quotation Rate The calculation result is appropriate. Ding's application for retrial claiming compensation calculated at an annual interest rate of 24% lacks factual and legal basis and is not supported by this court.

Currently, judicial practice has reached a consensus on the principal refund obligation of the purchase price in private bill discounting, but there are different judicial opinions on whether to support compensation for the loss of fund occupation. One view holds that supporting compensation for fund occupation lacks legal basis and therefore should not be supported. Another view holds that if the bill discounter (holder) has filed a lawsuit to claim the refund of the purchase price, and the obligor refuses to return the purchase price, there is fault. In this case, interest on the purchase price should be calculated and paid, which can be calculated based on the one-year LPR at the time of filing or according to the loan interest rate for the same period. This article adopts the second view.

Parties without statutory qualifications (including individuals, enterprises, sole proprietorships, companies) who engage in bill discounting as a business and disrupt the normal national financial order may be identified as "illegally engaging in fund settlement business" in serious cases and be subject to the crime of illegal business operation and criminal liability.

The crime of illegal business operation refers to a person who, without permission, operates goods subject to exclusive or monopoly sales or other restricted sales as stipulated by laws and administrative regulations (such as tobacco); buys and sells import and export licenses, certificates of origin, and other business licenses or approval documents stipulated by laws and administrative regulations; illegally operates securities, futures, insurance business without approval from relevant state authorities; or illegally engages in fund payment and settlement business, and other illegal business activities that seriously disrupt market order. If the circumstances are serious, criminal responsibility shall be pursued according to law. The crime of illegal business operation is a crime of severity, and criminal responsibility is only pursued when the circumstances are serious.

Article 3 of the "Interpretation by the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegal Fund Payment and Settlement Business and Illegal Foreign Exchange Trading," effective February 1, 2019, stipulates that illegal business amounts exceeding 5 million yuan or illegal gains exceeding 100,000 yuan constitute serious circumstances of the crime of illegal business operation, and criminal responsibility shall be pursued according to law. If the illegal business amount does not reach 5 million yuan or illegal gains do not reach 100,000 yuan, it is not considered serious and does not constitute a crime. If the illegal business amount reaches 25 million yuan or illegal gains reach 500,000 yuan, it is considered an especially serious circumstance of the crime of illegal business operation and may be subject to imprisonment of more than five years.

In addition, the crime of illegal business operation belongs to crimes that disrupt social market order and is different from crimes with serious personal danger and social harm such as intentional homicide, rape, and intentional injury. For such crimes, if the involved amount is not large, and the defendant pleads guilty and accepts punishment or has mitigating circumstances such as voluntary surrender or meritorious service and meets the conditions for probation, the procuratorate tends to recommend probation from the perspective of "cautious punishment."

Legal Provision: Criminal Law of the People's Republic of China Article 225 [Crime of Illegal Business Operation] Whoever violates state regulations and commits any of the following illegal business operations, disrupting market order, and the circumstances are serious, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and shall also be fined not less than one time but not more than five times the illegal gains; if the circumstances are especially serious, shall be sentenced to fixed-term imprisonment of not less than five years, and shall also be fined not less than one time but not more than five times the illegal gains or have property confiscated:

(1) Operating goods subject to exclusive or monopoly sales or other restricted sales as stipulated by laws and administrative regulations without permission;

(2) Buying and selling import and export licenses, certificates of origin, and other business licenses or approval documents stipulated by laws and administrative regulations;

(3) Engaging in securities, futures, or insurance business without approval from the relevant national authorities, or illegally engaging in fund payment and settlement business;

(4) Other illegal business activities that seriously disrupt market order.

"Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Law in Criminal Cases of Illegal Fund Payment and Settlement Business and Illegal Foreign Exchange Trading"

Article 4: Illegal engagement in fund payment and settlement business or illegal foreign exchange trading shall be deemed as "particularly serious" illegal business activities if any of the following circumstances exist:

(1) The amount involved in illegal business operations exceeds 25 million yuan;

(2) The amount of illegal gains exceeds 500,000 yuan.

If the amount involved in illegal business operations exceeds 12.5 million yuan, or the amount of illegal gains exceeds 250,000 yuan, and one of the four circumstances stipulated in the second paragraph of Article 3 of this interpretation exists, it may be recognized as "particularly serious" illegal business activity.

This article holds the view that according to the "Summary of the National Court Civil and Commercial Trial Work Conference" issued by the Supreme People's Court on November 8, 2019, if a bill discounter illegally engages in fund settlement business and the circumstances are serious, it constitutes the crime of illegal business operation. However, bearing criminal responsibility does not conflict with the civil rights that the bill discounter can lawfully exercise. The bill discounter can still file a dispute case to confirm the invalidity of the contract, requesting the bill seller to return the purchase price and bear the corresponding interest. However, if criminal issues are involved, and according to the provisions of the Civil Procedure Law that civil case trials must be based on the results of related criminal case trials, the civil trial should be suspended and resumed after the criminal case is concluded.