Determination and Legal Consequences of False Action in Private Lending 

Kun Song

False action refers to an act of litigation, where in order to gain illegal interests or evade legal responsibilities, an involved party fabricates or colludes with stakeholders, and uses methods such as fabricating evidence or facts to file a civil suit to the court, attempting to use the jurisdiction and executive power of the court to achieve illegal purposes.

Recently, online finance and P2P have been sorely hated by many. Multiple instances of platforms closing down due to inability to pay back investors have occurred, involving various financial products, easily reaching tens or hundreds of billions of RMB in value. Some of the most famous cases recently in the Shanghai area are Zhongjin and Kuailu, which involved great amounts of capital borrowing, and involved plenty of celebrities and even government figures; all the innocent onlookers were left scratching their heads in response. In September 2018, Qin Xu of Zhongjin was given a life sentence for fraudulent fund-raising; in October 2018, when the second instance trial for the Kuailu illegal pooling of public deposits case series opened at the Shanghai First Intermediate People's Court, the court ordered three full buses. They were packed with security personnel with the purpose of stopping the victims from taking excessive action due to intense emotions.

This article will analyze the No. 68 guidance case issued by the Supreme Court in 2015. This case set requirements and methods to examine and determine false action based on related rules in the Civil Procedure Law, and also provided a practical research basis for the issuance of the Supreme Court’s Regulations on Various Issues Related to Laws Applied to the Trial of Private Lending Cases, regulations made for the crackdown on false action. Therefore, this article will use this case as a starting point to introduce the determination and legal consequences of false action in private lending.

As we all know, the Supreme People’s Court has established a total of six circuit courts. In terms of reasoning and adoption of laws in sentences, conflicts may still arise between each of these circuit courts; the same case may receive completely different sentences in different areas. Therefore, the Supreme Court has given a notice that in the reasoning section of court sentences, if other court verdicts are to be adopted, the court may only reference the guidance cases issued by the Supreme Court. Hence, this article will remain quite conservative and will not consider other cases sentenced by the Supreme Court headquarters, or its circuit courts.

Case Overview

Shanghai Oubao Biotechnology Co., Ltd. vs. Liaoning Trevi Real Estate Development Co., Ltd. business loan dispute case, second instance civil verdict [Supreme People’s Court (2015) Min Er Zhong Zi No. 324]

I. Yeli Qu is a controlling shareholder of Oubao; Zuoxin Wang is the original legal representative of Trevi, and is also a controlling shareholder and legal representative of Hanhuang. Zuoxin Wang and Yeli Qu are married. In addition, there is a mixing of persons involved in Oubao, Trevi, and other related companies.

II. From 2007 to 2009, Oubao had lent a total of 86.5 million RMB to Trevi. For 6 of the remittances, on the day of receiving the remittance or a few days later, Trevi immediately transferred the money out, totaling more than 70.5 million RMB transferred. 5 of the transfers were sent to Hanhuang, totaling more than 64 million RMB.

III. When the borrowing period expired, Oubao brought a suit to the Liaoning Higher Court, requested the court to sentence Trevi to return the borrowed funds, and applied for property preservation. The Liaoning Higher Court sentenced Trevi to return its borrowed funds to Oubao. During the first instance trial, Oubao continued to transfer a total of 3.6 million RMB to Trevi. Trevi’s legal representative was changed from Zuoxin Wang to Wenqi Jiang.

IV. After the sentence took effect, Oubao applied to the Liaoning Higher Court for execution. Trevi’s creditor Tao Xie appealed to the Liaoning Higher Court with the reason that Oubao and Trevi fabricated debts for false action; the Liaoning Higher Court ruled for a retrial. After examination, the Liaoning Higher Court came to a verdict to dismiss the suit brought up by Oubao.

V. Oubao was not satisfied with the verdict, and appealed to the Supreme Court. The Supreme Court decided that this case was considered false action, rejected the appeal, maintained the original judgment, and simultaneously made the judgment to fine both Oubao and Trevi 500 thousand RMB.

Reason for judgment:

Through the two angles of rationality of lending relations, and whether the disputed lending relations included malicious collusion to damage others’ legal rights, the Supreme Court judged that the involved lending is considered false action.

Oubao brought up the case, requesting Trevi to return the borrowed 86.5 million RMB and interest. Although Oubao provided the loan contract and transfer voucher, there were contradictions between its self-proclaimed and provided evidence, and other evidence on record. Many words and actions of the involved parties before and after the suit were unnatural, primarily demonstrated in the 7 areas below:

First, judging from how the loan agreement was formed, it is possible the loan contract was faked.

Oubao and Trevi could not clearly state the details regarding the offer and undertaking of the loaning legal relation. In particular, the legal representative of creditor Oubao, Huiguang Song, who claimed to be the contract agent, provided vague information about the details such as the time and place of signing, agents of both parties, etc. for all of the loan contracts. All involved loans were large in value, yet the involved parties could not clearly describe the details, or even the general circumstances, for the signing of the contracts; this is unreasonable.

Second, judging from the timing of loans, there are contradictions in the evidence provided by the involved party.

According to Oubao’s own words and the loan contract it provided, Oubao began its lending relation with Trevi as of July 2007. After an appeal was made to the Supreme Court, the audit report self-entrusted by Oubao then specified that Oubao began lending money to Trevi as of December 2006. However, according to the transaction details of Oubao and Trevi’s bank accounts, before December 2006, the No. 8115 account of Oubao had already conducted two transfers up to 11 million RMB in value. Within them, 3 million RMB was transferred to Trevi’s account in the name of a “loan” on March 8, 2006; on June 12 of the same year, another 8.01 million RMB was transferred.

Third, judging from the amount loaned, there are contradictions in the involved party’s claims.

After Oubao brought up the case, it first claimed that the total amount lent from July 2007 was 58.5 million RMB; then, during the lawsuit, it changed to 86.5 million RMB; afterwards, during the appeal, it claimed the total was 108.5 million RMB. The claimed loan amount changed many times, but only a loan contract for 86.5 million RMB was provided.

On the other hand, the bank transfer voucher submitted by Tao Xie in court showed that other than the 108.5 million RMB Oubao claimed it lent, an additional 4.4 million RMB was transferred to Trevi’s account in the name of a “loan”. Regarding this, Oubao admitted that these extra funds were transferred under Zuoxin Wang’s request, and were not truly loans. This admittance showed that the purposes of funds Oubao wrote on the bank voucher were extremely arbitrary. Based on the bank account transaction details the court obtained, the funds Oubao transferred into Trevi’s account in the name of a loan far exceeded its various claims. In addition, many other large sums of money transferred into Trevi’s account in the name of a “loan” were not listed under the range of loans claimed by Oubao.

Fourth, judging from the flow of funds, Oubao one-sidedly tracks money outflow from its account and does not track money inflow.

Whether during the loan period stated on the involved loan contract, or before, or even after the lawsuit began, there have been capital uperation where Oubao transferred funds to Trevi’s account, and  Trevi transferred funds to Oubao’s account. However, Oubao only calculated the debit amount transferred out of its account, and never mentioned the credit amount transferred from Trevi to its account.

Fifth, judging from the transfers between all the related companies, there are circulated transfers between two or more accounts.

As stated above, through cross referencing the accounts of Oubao, Trevi, Hanhuang, Shaqi, etc., it was found that Trevi’s funds had been transferred to Hanhuang, passed through Oubao’s account, and then transferred back to Trevi, causing a false increase in loan amount. The money flow between Trevi and other related companies also shows such trends.

Sixth, judging from the purpose of the loans, they contradict the purpose stated in the contract.

Article 2 of the loan contract stated that the loan was only to be used on the Trevi International Garden real estate project, but most of the time, after Trevi received the involved transfers, it immediately transferred the funds to Hanhuang and Shaqi in the names of “loans” or “repayment” respectively, and these funds ended up flowing back to Oubao and Trevi Shenyang, which is controlled by Oubao. As for Oubao’s defense that the funds Trevi transferred to Hanhuang were loan repayment, because the loan amount it provided contradicted the actual transaction amount between the two companies, and judging from the flow of money, most of it flowed back to Oubao and the companies it controls, therefore its defense was not valid.

Seventh, judging from the actions of Oubao, Trevi, and their related companies during the trial and execution, they contradict common sense.

After Oubao filed the lawsuit, it still transferred cash to and from Trevi; Trevi constantly transferred large sums into Oubao’s account, but did not object against any of Oubao’s requests for repayment during the trial and execution; Oubao applied to the Liaoning Higher Court for asset preservation, but Trevi’s shareholder Yang Wang provided a guarantee using all his real estate for Oubao, who should have opposing interests against him; the real estate in Qingpu, Shanghai that Oubao provided for guarantee in the first instance trial was actually owned by Shanghai Trevi, legally represented by Zuoxin Wang; and both Oubao and Trevi admitted in court that the accounts that Oubao opened in the China Construction Bank Donggang Branch and the China Construction Bank Shenyang Maluwan Branch were both controlled by Zuoxin Wang.

Oubao and Trevi did not provide reasonable explanations for the above contradictions and illogical points. Therefore, it can be seen that Oubao did not provide enough evidence to prove that there is a genuine loan relation between Oubao and Trevi regarding the disputed funds. In addition, through the transaction details of Oubao, Trevi, and their related companies, it was found that these companies made arbitrary transfers between each of their accounts or between their own accounts, with arbitrary purposes written. In accordance with other evidence on record, the court was confident that the claims brought up by Oubao were fabricated using extractions from the transactions between it and Trevi. Their request for Trevi to return the 86.5 million RMB loan and its interest based on the fabricated claims should not be supported. Therefore, the second instance sentence made by the Liaoning Higher Court to reject the litigation claim is reasonable.

Regarding whether Oubao and Trevi committed malicious collusion to damage others’ legal rights by filing this case

First of all, both Oubao and Trevi clearly knew about the claims and debts between Trevi and the first instance appellant, Tao Xie, and other creditors. Judging from the process of sentencing and execution, after Oubao applied for execution, it did not agree with the court auctioning the seized house property, and instead allowed Trevi to sell the property; with each house sold, Oubao then applied for the court to unseal the house sold. When undergoing court inquiry, Oubao could not clearly state how much seized property Trevi sold or how much debt it repaid. This reflected that filing this case was not in order to reclaim debt; instead, it was in order to carry out a protective seizure through judicial procedures to protect other creditors from seeking Trevi’s compensation. It is clear that there are fabricated claims, malicious collusion, and a purpose of damaging others’ legal rights.

Additionally, based on the facts that there is a mixing of persons involved in Oubao and Trevi, and that their bank accounts are both controlled by Zuoxin Wang, the two companies belong to the same person and have both lost their independent personalities of the corporate legal persons. According to the Civil Procedure Law of the People’s Republic of China: “Where the parties collude with each other viciously and attempt to escape from debts or misappropriate the property of another person by means of litigation or intermediation, the people’s court shall deny their claim and according to the seriousness of the circumstances impose a fine upon or detain them; if a crime is constituted, criminal responsibility shall be investigated according to law.” The opinion of the first instance appellant, Tao Xie, that Oubao and Trevi committed malicious collusion in order to damage his legal rights, is justified in law and should be supported.

Key points of judgment

When hearing a civil case, if the People’s Court finds that there is a possibility of false action, it shall search for the relevant evidence through its authority; perform detailed inquiry into the involved parties; and perform a comprehensive and strict examination into whether there are contradictions in the reason for litigation and the related evidence, as well as whether the involved parties’ actions during the trial are illogical. Through comprehensive examination, if there are fabricated facts, malicious collusion, or evasion of laws and regulations involved, the court shall impose sanctions according to the law.

In private lending, false action is typically a fraud weaved together under a “legal” guise, in order to confuse judges and infringe upon an involved party’s rights. Because this type of case often contains complex relationships, and is often clandestine and deceptive, it is more difficult for judges to determine false action in private lending cases in judicial practice. Therefore, the Supreme Court’s Regulations on Various Issues Related to Laws Applied to the Trial of Private Lending Cases set out ten possible situations that may constitute false action, and requires judges to make overall judgments based on trial experience and common sense.

These ten situations are:

 (1) The lender is clearly unable to lend;

 (2) The facts and purpose the lender uses as a basis to file the suit clearly contradict common sense;

 (3) The lender cannot provide a voucher for credit, or the voucher for credit provided is possibly forged;

 (4) Both involved parties have participated in many private lending lawsuits within a certain time period;

 (5) One or both involved parties refuse to attend the trial without a proper reason, and their representative cannot clearly state the facts related to the loan or provides contradicting statements;

 (6) Both involved parties have no disputes or pleadings regarding the facts of the loan, which clearly defies common sense;

 (7) The spouse or partner of the borrower, or other creditors not involved in the case, brings up objections with factual evidence;

 (8) In other disputes, the involved party has transferred property at a low price;

 (9) The involved party improperly waives his or her rights;

 (10) Other situations where false action in private lending may exist.

It should be noted that false action is not only used to obtain a beneficial verdict for the forger; it may also be used to fraudulently obtain a civil mediation document from the People’s Court. For this type of false action, after the People’s Court investigates and determines the fraud through a second instance or retrial, it shall revoke the civil mediation document, deny the first instant plaintiff’s claim, and impose sanctions on his or her actions of harming the civil procedure.

Related laws and regulations

Civil Procedure Law of the People’s Republic of China

Article 112: Where the parties collude with each other viciously and attempt to escape from debts or misappropriate the property of another person by means of litigation or intermediation, the people’s court shall deny their claim and according to the seriousness of the circumstances impose a fine upon or detain them; if a crime is constituted, criminal responsibility shall be investigated according to law.

The Supreme People’s Court’s Regulations on Various Issues Related to Laws Applied to the Trial of Private Lending Cases

Article 19: When hearing private lending dispute cases, if the People’s Court finds the following cases exist, it shall strictly examine the reason, time, and place of the loan; the origin of the funds; the payment method; the destination of money flow; and the relationship and economic status of the two involved parties, and perform an overall judgment on whether this case constitutes false civil action.

 (1) The lender is clearly unable to lend;

 (2) The facts and purpose the lender uses as a basis to file the suit clearly contradict common sense;

 (3) The lender cannot provide a voucher for credit, or the voucher for credit provided is possibly forged;

 (4) Both involved parties have participated in many private lending lawsuits within a certain time period;

 (5) One or both involved parties refuse to attend the trial without a proper reason, and their representative cannot clearly state the facts related to the loan or provides contradicting statements;

 (6) Both involved parties have no disputes or pleadings regarding the facts of the loan, which clearly defies common sense;

 (7) The spouse or partner of the borrower, or other creditors not involved in the case, brings up objections with factual evidence;

 (8) In other disputes, the involved party has transferred property at a low price;

 (9) The involved party improperly waives his or her rights;

 (10) Other cases where false action in private lending may exist.

Article 20: Upon finding that the case constitutes false action, if the plaintiff applies to withdraw the lawsuit, the People’s Court shall not accept, and shall deny their claim according to Article 112 of the Civil Procedure Law.

Where participators in the litigation or other persons maliciously create or participate in false action, the People’s Court shall impose a fine upon or detain them according to Article 111, 112, and 113 of the Civil Procedure Law; if a crime is constituted, they shall be sent to an administrative agency with jurisdiction so criminal responsibility can be investigated.

Where a company maliciously creates or participates in false action, the People’s Court shall impose a fine upon the company, and can impose a fine upon or detain its chiefly responsible person or directly responsible persons; if a crime is constituted, they shall be sent to an administrative agency with jurisdiction so criminal responsibility can be investigated.

The Supreme People’s Court’s Circular on Lawful and Proper Trial of Private Lending Dispute Cases to Promote Economic Development and Maintain Social Stability (December 2, 2011, Law [2011] No.336)

7. Take precautions against and impose sanctions on false action. When hearing private lending dispute cases, the People’s Court shall objectively and comprehensively examine all evidence submitted by both parties; an overall examination judgment shall be made through factors such as the relevance of each piece of evidence to the case, and the relation between different pieces of evidence. Where there are “IOUs” or “receipts” with flaws in their format, other evidence should be jointly considered to decide whether a loan relation exists; for loans paid in cash, an overall judgment can be made based on factors such as payment vouchers, ability to pay, transaction habits, amount of money loaned, relations between the involved persons, and details of the transaction process as stated by the involved persons. If there is suspicion of false action, the court should investigate and collect evidence without delay through its authority or by submitting to relevant departments, and find out the truth. If investigation shows that it is indeed false action, the people’s court shall deny their claim and impose sanctions for harming the civil procedure; if the false action was taken to swindle property or to evade debt, and a crime is constituted, criminal responsibility shall be investigated according to law.

The Supreme People’s Court’s Circular on Lawful and Proper Trial of Private Lending Dispute Cases (Law [2018] No.215)

Increase examination into the facts and evidence of loans. Those who set up “fake loan” frauds are typically intellectual criminals, who are skilled in creating closed loops of evidence through methods such as fabricating increases in debt, creating traces of bank statements, losing contact on purpose to create a breach of contract, etc., and thus achieve illegal purposes through civil litigation procedures. Therefore, when People’s Courts try private lending dispute cases, other than examining proof of debt such as debit certificates, receipts, and IOUs, and proof of transaction such as bank statements, as stated in Articles 15 and 16 of the Supreme People’s Court’s Regulations on Various Issues Related to Laws Applied to the Trial of Private Lending Cases, it should also examine factors including: the origin of funds, transaction habits, economic capacity, changes in property, relations between the involved persons, and statements by the involved persons, to form an overall judgment of the true state of the loan. If there is reasonable suspicion of a crime, and the representative cannot explain the case details, the involved person should be personally summoned to court, and undergo inquiry related to the case details. Investigation and evidence collection should be strengthened to discover the truth.

This year, the Supreme Court issued two judicial documents, the Supreme People’s Court’s Circular on Lawful and Proper Trial of Private Lending Cases and the Supreme People’s Court and Supreme People's Procuratorate’s Explanations on Several Issues Related to Laws Applied to the Trial of False Action Criminal Cases. Both documents are aimed at the changes in private lending cases, including increase in complexity, a need for greater expertise, crossing with criminal cases, etc.

As the saying goes, private lending is the world’s oldest business, and our country has never banned normal lending activity; however, in order to prevent criminals from taking advantage of the hysteresis of law and swindling the public’s property, my personal experience is this: whether collecting or returning funds, always use electronic payment methods such as bank transfers. This is because as required by accounting standards and the Commercial Bank Law, bank statements must be stored for at least 15 years, which is enough to provide evidence when disputes arise.

Personally, I don’t recommend transferring money through Alipay or WeChat Pay, because the transfer data is all stored in the mobile terminal; after the mobile device is replaced or damaged, the payment voucher will be difficult to retrieve. In addition, both commercial payment companies did not clearly state a storage period for its payment data, and it is difficult to retrieve the data.