Perspective | A Legal and Practical Analysis of Private Lending in the Form of Financial Leasing

Article 735 of the Civil Code of the People's Republic of China clearly defines a finance lease contract as follows: It is a contract in which the lessor, based on the lessee’s selection of the seller and the leased property, purchases the leased property from the seller and provides it for the lessee’s use, with the lessee paying rent. This definition highlights the dual nature of finance leasing—“financing plus asset provision”—and underscores that its core lies in the superposition of two fundamental legal relationships: first, the sales contract relationship between the lessor and the seller; and second, the lease contract relationship between the lessor and the lessee.

Compared with loan contracts, the key feature of financial leasing lies in the “financing of assets” stage: The leased asset must objectively exist and be specifically identifiable. During the lease term, the lessor retains ownership, and the leased asset essentially serves as a collateral for the lessee’s rental payment claims. The rent paid by the lessee covers not only the acquisition cost of the leased asset but also the cost of capital and the lessor’s reasonable profit. Therefore, the actual existence of the leased asset and the transfer of ownership from the seller to the lessor are essential prerequisites for establishing a legal relationship under financial leasing—neither can be missing.

The core of a loan contract is a purely financial lending relationship: after borrowing funds, the borrower repays the principal and pays interest at maturity. Such a contract involves neither the “financing of goods” element nor the participation of a third-party seller, and it does not entail any transfer of ownership of the leased item. In judicial practice, when a transaction lacks a genuine leased item, or although the leased item exists in name only, it has not been physically delivered and its ownership has not been transferred—resulting in a situation where only fund flows exist without any substantive financing of goods—the courts typically characterize the arrangement as a loan relationship.

The relevant judicial interpretation issued by the Supreme People's Court explicitly stipulates: “For contracts styled as financial lease agreements but which in reality do not constitute a legal relationship of financial leasing, the people’s courts shall handle them according to the actual legal relationship they embody.” This principle—placing substance over form—directly targets the collusive and fictitious conduct by the parties who use false contractual forms to conceal their true legal relationships. Article 146 of the Civil Code provides that civil legal acts carried out through collusive and fictitious expressions are invalid; however, the validity of the underlying, concealed legal relationship must be determined in accordance with applicable provisions. For example, in the retrial case of “ICBC Financial Leasing Co., Ltd. v. Tongling Dajiang Investment Holding Co., Ltd.,” the court held that the sale-and-leaseback contract was... Collusive false representation However, the hidden lending relationship between enterprises is recognized as valid because it does not violate mandatory provisions regarding validity.

It is worth noting that Article 737 of the Civil Code introduces a new special provision: “A finance lease contract entered into by the parties through the fictitious creation of a leased object shall be invalid.” Compared with the previous Contract Law, which relied on the criterion of “using a legal form to conceal an illegal purpose,” this provision provides judicial authorities with a clearer basis for adjudication. In practice, as long as a transaction lacks a genuine leased object or the transfer of ownership, or if the value and functionality of the leased object cannot serve as security, the transaction can be deemed to have merely financing substance and should be treated as a loan relationship.

In practice, “financing leases in name but loans in reality” are often achieved through specific transaction structures, including sale-and-leaseback arrangements and improper repurchase clauses. Abnormal leased property The three types of situations are the most typical.

Sale-and-leaseback is a transaction model in which the lessee sells its own assets to the lessor and immediately leases them back for use, with ownership being reclaimed upon expiration of the lease term. In essence, this model should combine both financing and asset leasing functions—allowing the lessee to obtain funds while enabling the lessor to secure its claims through ownership rights. However, since the lessee and the seller are the same entity, this model is often questioned as being merely “selling and leasing to oneself,” akin to a loan secured by collateral.

Article 2 of the “Interpretation by the Supreme People’s Court on Issues Concerning the Application of Law in the Adjudication of Disputes over Finance Lease Contracts” clearly states: “If a lessee sells its own property to a lessor and then leases it back through a finance lease contract, the people’s court shall not invalidate the finance lease relationship solely on the ground that the lessee and the seller are the same person.” This means that as long as the leased asset genuinely exists and the transfer of ownership has been completed, sale-and-leaseback transactions are legally valid. This model has also been recognized by regulatory policies and has become a core business for many finance leasing companies.

When sale-and-leaseback transactions become mere formalities, with the delivery of leased assets and the transfer of ownership reduced to mere paper procedures, such transactions may be characterized as loans. For example, in a dispute between Guotai Leasing Company and a certain property development company—judged by the Supreme People's Court—the property development company engaged in sale-and-leaseback transactions using under-construction properties that were illegally constructed. Since the properties could not be transferred legally, the lessor never actually acquired ownership from the outset. The court ruled that, despite being aware of the defects in title, the lessor still extended the loan, indicating that the lender’s true intention was to make a loan rather than to engage in a genuine lease. Furthermore, the lessee “could not possibly have been leasing its own property,” thus revealing that the transaction was, in fact, a form of financing. Ultimately, the court determined that the transaction constituted an inter-enterprise loan.

As can be seen, the core risk underlying the transformation of sale-and-leaseback into a loan lies in either the failure to complete the actual delivery and transfer of ownership of the leased asset, or the legal unavailability of the asset for leasing, or transaction arrangements that defy common sense. In practice, when engaging in such business activities, it is essential to ensure that the leased asset genuinely exists. For real estate, it is necessary to verify the property rights and the feasibility of the transfer; for movable property, evidence of delivery must be retained (such as handover lists or transfer documents). This is to prevent the relationship from being reclassified due to the absence of the “asset financing” stage.

A repurchase clause is an arrangement under which a third party—typically an affiliate of the seller or lessee—agrees to repurchase the leased asset at an agreed-upon price under specified conditions. A make-good clause is similar in nature and is intended to mitigate the lessor’s risk. However, improperly designed “floor” clauses can strip the transaction of its inherent risk characteristics of financial leasing, transforming it into a fixed-income loan instead.

Regulatory authorities impose strict restrictions on such clauses. The "Administrative Measures for Financial Leasing Companies" explicitly prohibit financial leasing companies from entering into explicit or implicit repurchase agreements or make-up payment agreements, thereby preventing them from engaging in lending activities in disguise. From a judicial perspective, repurchase clauses are not the sole basis for determining whether a transaction constitutes a loan; however, when combined with circumstances such as inflated values of leased assets and the lessor’s lack of involvement in management, they can become crucial evidence in determining the absence of genuine financing underlying the transaction. For instance, in case No. (2020) Zhe Min Zhong 1286, the court, taking into account both the third-party repurchase arrangement and the unidirectional flow of funds, comprehensively concluded that the transaction was, in fact, a loan.

If the repurchase price is equivalent to the lessor’s principal plus a fixed return—that is, if the lessor’s earnings are effectively locked in—the transaction essentially amounts to a loan. For example, in a sale-and-leaseback arrangement, if the lessee agrees to repurchase the equipment at its original price upon expiration, the lessor need not bear any risk of asset depreciation and simply collects rental payments (which in reality are interest payments). In such cases, the “financing of the asset” is merely formal; the core of the transaction is, in fact, a loan of funds. Moreover, the arrangement under which the lessee makes up any shortfall by repurchasing the equipment at the outstanding rental amount in the event of default also eliminates the uncertainty inherent in the earnings of financial leasing, reducing the transaction to a straightforward loan model of “principal plus interest.”

In such cases, the court’s central focus of review is whether the repurchase clause has eliminated the “risk of asset financing”: If the arrangement is merely a typical commercial arrangement (such as the repurchase of defective equipment) and the lessor’s income is affected by the value of the leased asset, this does not affect the characterization of the transaction as a financial lease. However, if the arrangement results in a guaranteed principal and fixed return, combined with factors such as anomalies in the leased asset, it will be deemed a collusive sham. In the aforementioned Guotai Leasing case, the combination of “discharging the loan despite knowing about title defects and agreeing to a repurchase” was specifically identified as constituting an agreement to lend money.

The leased asset is the core element of financial leasing; its absence, inflated value, or lack of eligibility are among the most common methods used to conceal lending arrangements.

1. The leased property does not exist.

The loss of the underlying asset for a fictitious lease typically stems from malicious collusion between the parties involved or from the lessee’s fraudulent loan application. After the court verifies these facts, it will declare the contract invalid pursuant to Article 737 of the Civil Code and treat it as a loan agreement instead. The Supreme People’s Court has also expressed its position very clearly: “A transaction that involves only financial lending without a definite leased asset and transfer of ownership does not constitute a finance lease.”

2. The value of the leased property is inflated.

When the lessee and lessor collude to inflate the value of the leased asset in order to siphon off funds, such practices are often accompanied by substituting inferior goods for superior ones and engaging in repeated financing. If the lessor knowingly or should have known that the pricing was artificially inflated yet still extended the loan, it indicates that the lessor’s intention was to profit from the interest rate spread. In such cases, courts tend to classify the arrangement as a loan. In the case of “ICBC Leasing Co., Ltd. v. Hua Company,” the actual value of the equipment was 100 million yuan, but it was overvalued to 150 million yuan. The lessor purchased the equipment at a price far exceeding the market value, and the rental payments significantly deviated from the equipment’s true value. Ultimately, the court treated the transaction as a loan.

In reviewing the issue of inflated pricing, courts apply the “obvious imbalance” standard: If the agreed-upon price significantly deviates from the market value without a reasonable basis, and there is corroborating evidence of collusion, the court will uphold the borrower’s defense. However, if the deviation falls within a reasonable range or there is no evidence of collusion, the court will not readily invalidate the finance lease. For example, in case No. (2019) Su 01 Min Zhong 1388, the lessee claimed that the medical equipment had been overvalued by a factor of two. However, since there was no evidence of collusion and the lessor had fulfilled its due diligence obligations, the court dismissed the lessee’s defense.

3. The leased property is unfit.

When the leased object cannot be specifically identified, lacks any use value, or is a consumable item, this will also affect its classification. For example, in case No. (2020) Hu74 Min Zhong 580, the leased object was merely described as “10 vehicles,” without specifying details such as models or vehicle identification numbers. Since the lessor could not provide evidence of their existence, the Shanghai Financial Court ruled that the transaction lacked the characteristics of a finance lease. Similarly, consumable raw materials, once used up and losing their value, are unable to serve as collateral and are therefore likely to be classified as loans.

In recent years, judicial practice has reached a consensus: taking the leased property as the core and adhering to the principle that substance prevails over form, false lease transactions should be reclassified and their validity properly determined. The following analysis, based on typical cases, will elucidate the reasoning behind the court’s rulings.

In most court rulings, the definition of financial leasing provided in Article 735 of the Civil Code is first cited, and several key characteristics distinguishing financial leasing from simple lending are enumerated. The court then examines whether the transaction at hand meets these characteristics. If it is found that the transaction lacks the “asset-financing” feature—meaning there is merely an exchange of funds without any actual transfer of ownership or use of a physical asset—the court will directly determine that no legal relationship of financial leasing exists. A financial leasing transaction possesses both financing and asset-financing attributes, neither of which can be absent. If there is no actual leased asset, or if ownership of the leased asset has not been transferred from the seller to the lessor, or if the value of the leased asset is significantly undervalued and thus fails to serve as adequate security for the leasing claim, such a financial leasing contract should be deemed to lack the asset-financing attribute and amount to nothing more than a mere circulation of funds—essentially a loan disguised as financial leasing—and should therefore be classified as a loan agreement. In its published case analysis, the No. 2 Intermediate People’s Court of Tianjin also emphasized: “The objective existence of the leased asset and the possibility of transferring ownership thereof are crucial features that distinguish financial leasing from loan agreements. If there is only a flow of funds without a specific leased asset, the transaction should be treated as a private loan.” Thus, regardless of how complex the transaction form may be, courts ultimately return to examining the core element of the leased asset in order to determine the nature of the contract.

1. Basic Facts of the Case

Cathay Leasing signed a sale-and-leaseback contract with Sanwei Real Estate, using 137 under-construction illegally constructed commercial properties as the underlying assets, with a transfer price of 100 million yuan. Since the properties lack pre-sale permits and are classified as illegal constructions, they cannot be transferred into the lessor’s name.

2. Key points for referees

The court found that the lessor, as a professional entity, should have been aware of the defects in title and had the genuine intention of making a loan. The lessee “could not possibly be leasing its own property”; rather, the arrangement was essentially a form of financing. Therefore, the relationship between the two parties is one of loan. As for the validity of the contract, since there is no evidence indicating that the lessor’s primary business is lending and the loan was made for operational purposes without violating any prohibitive provisions, the loan contract is valid.

3. Rule establishment

This case clearly established two core rules: first, the qualitative rule that “where there is no transfer of ownership, the transaction should be treated as a loan”; and second, the rule regarding the validity of financing lease companies engaging in disguised lending—such practices are valid as long as they do not violate mandatory legal provisions. Since then, courts across various regions have consistently followed this approach when adjudicating similar cases.

1. Basic Facts of the Case

ICBC Leasing entered into a sale-and-leaseback contract with Company Hua, agreeing to purchase equipment at a price of 150 million yuan. However, most of the invoices submitted by the lessor were photocopies that did not correspond to the actual equipment, and the true value of the equipment was only 106.8 million yuan—significantly lower than the contract price.

2. Key points for referees

The court held that: There is no evidence to prove the actual existence of the leased property or the transfer of ownership. The inflated price has caused the rental amount to deviate significantly from the property’s true value; therefore, there is no genuine financing arrangement involved, and the relationship should be characterized as a loan. As for the validity of the agreement, although the finance lease structure constitutes a collusive and fictitious expression and is thus invalid, the underlying loan relationship—driven by the enterprise’s operational needs—is in compliance with Article 11 of the “Judicial Interpretation on Private Lending” and should be recognized as valid. At the same time, it was clarified that regulatory violations do not affect the validity of the civil contract.

3. Deepening the rules

This case further reinforces the principle that “no financing without underlying assets constitutes no lease,” and establishes the judicial logic that “a superficial contract is invalid, but the underlying loan remains valid.” This also serves as a reminder to financial leasing companies to strengthen their review of leased assets.

In case No. (2020) Hu 74 Min Zhong 580, since the leased object was not specifically identified and there was no evidence of delivery, the court treated the transaction as a loan. In case No. (2021) Supreme People's Court Min Zhong 44, however, because the transaction was genuine, ownership had been transferred, and the leased object served as security, the court dismissed the defense that the transaction was a loan. These cases demonstrate that courts must comprehensively assess the situation by considering such factors as the specificity of the leased object, the transfer of ownership, and the reasonableness of the rental payments, and should not readily invalidate the validity of a lawful financial lease.

With regard to financing lease-based private lending, judicial practice adopts two different approaches. The first approach involves apparent invalidity coupled with hidden validity: A collusively fictitious financing lease contract is deemed invalid; however, if the underlying loan relationship does not violate any mandatory provisions, it will be recognized as valid. In such cases, the court will, pursuant to Article 157 of the Civil Code, order restoration to the original state—meaning the lessee returns the principal amount, and the lessor returns any excess profits—and then adjust interest losses according to the underlying loan relationship. At this point, the lessor forfeits any agreed-upon rights, such as the right to repossess the leased asset. The second approach directly converts the relationship: Rather than declaring the contract invalid, the court simply treats it as a loan relationship. For instance, in the Guotai Leasing case, the court directly recognized the arrangement as a valid inter-enterprise loan. As for such lending activities conducted by non-licensed institutions, Article 11 of the Judicial Interpretation on Private Lending applies: As long as the lending is for business purposes and does not violate any laws, it will be deemed valid.

After the transaction is converted into a loan, the rent must be broken down into principal and interest. The transfer price of the leased property is typically treated as the loan principal, with any amount exceeding that considered interest. Interest is subject to a cap of four times the Loan Prime Rate (LPR); amounts exceeding this cap will not be supported. Furthermore, if a security deposit is determined to be “front-end interest” (i.e., disguised as a deposit but actually serving as interest), it must be deducted from the principal. Similarly, fees and pre-rental interest that are essentially in nature of interest are also subject to the interest rate cap. If the penalty for breach of contract is excessively high, the court may adjust it in accordance with the law.

The original security arrangement needs to be recharacterized. The guarantor remains liable for the guarantee obligation, but the lessor loses the right to repossess the leased property (since ownership has not been transferred). A repurchase commitment may be treated as a mortgage or pledge—for example, in the Cathay Leasing case, real estate that had not been transferred was treated as security for the loan. Overall, property rights protection will be weakened; the lessor will have to rely on creditor rights and security interests to safeguard its interests, while the lessee will lose the right to raise property-based defenses under lease law.

If a licensed financial leasing company engages extensively in business activities without any genuine underlying leased assets, it may be deemed to be operating beyond its authorized scope and could face penalties such as being ordered to make rectifications, fined, or even having its qualifications revoked. Furthermore, non-licensed entities that engage in high-interest lending under the guise of leasing may be found guilty of illegal business operations.

Ensure the authenticity of transactions: Strengthen due diligence on leased assets, verifying their existence, ownership, and value to eliminate false contracts and invoices. Design terms prudently: Avoid loan-like features such as ultra-short lease terms, fixed interest rates linked to loans, and guaranteed principal repurchase clauses. Repurchase clauses should be limited solely to asset disposal and must not guarantee principal returns. Comply with prescribed pricing: The actual yield rate calculated from rent and fees shall not exceed four times the Loan Prime Rate (LPR), thus avoiding classification as usury due to excessively high returns. Perfect the chain of evidence: Retain documents such as lists of leased assets, invoices, delivery receipts, ownership documents, and appraisal reports to substantiate the authenticity of the financed assets. Strengthen compliance reviews: Identify and address transactions that circumvent regulatory oversight, guiding genuine financing needs toward formal channels. Attach great importance to creditworthiness assessments: Evaluate lessees’ ability to fulfill contractual obligations in accordance with lending standards, thereby reducing reliance on fictitious leases.