Earth Research | Understanding Creditor's Right of Rescission in One Article

The right of a creditor to rescind a transaction refers to the right of a creditor to rescind a debtor's disposition of property through litigation when the debtor engages in improper disposition of property during the subsistence of the creditor-debtor relationship, affecting the realization of the creditor's claim. The system of the creditor's right of rescission breaks through the relativity of contracts and aims to protect the interests of all general creditors. This article analyzes the constituent elements of the creditor's right of rescission one by one for reference.

Constituent Elements of the Creditor's Right of Rescission I

(1) The creditor has a legal and valid claim against the debtor

A legal and valid claim is the premise and basis for the exercise of the creditor's right of rescission. On the one hand, the origin of the claim must be legal; claims arising from illegal acts such as gambling debts do not have the expectation of being protected by this system. On the other hand, the claim must be an existing claim; claims that have already been extinguished or have not yet arisen are not protected by this system. However, there are exceptions, namely, if the claim that has not yet arisen is highly likely to arise, then the debtor's dispositional act has subjective malice. If it is not restricted, it will violate the original intention of the establishment of the system.

It is worth noting that neither the Contract Law nor the Civil Code stipulates that this claim must be a claim due at a certain date. The reason is that the ultimate legal effect of this system is that the debtor's fraudulent act is rescinded and has no legal binding force from the outset, rather than the direct realization of the creditor's claim.

(2) The debtor has engaged in fraudulent behavior

(1) Types of Fraudulent Behavior

According to Articles 538 and 539 of the Civil Code, fraudulent behavior can be divided into two categories:

One is the debtor's gratuitous disposition of property rights. That is, the debtor did not receive any consideration when carrying out the disposition. For example, waiving a claim, waiving collateral for a claim, gratuitously transferring property, and maliciously extending the performance period of a due claim, etc.

Two is the debtor's compensated disposition of property rights. That is, although the debtor obtained consideration from the counterparty for the disposition of property rights, the consideration is clearly disproportionate to the disposition. For example, transferring property at a clearly unreasonable low price, accepting property from others at a clearly unreasonable high price, or providing guarantees for the debts of others, etc.

(2) Judgment of Fraudulent Behavior in Different Situations

1. Judgment of the fraudulent nature of the debtor waiving a claim. Regardless of whether the debtor's claim is due, as long as the debtor's waiver of its claim against the secondary debtor affects the realization of the creditor's claim, the creditor may exercise the right of rescission.

2. Judgment of the fraudulent nature of the debtor waiving collateral for a claim. Secured claims are contingent claims, and waiving collateral for a claim does not always necessarily lead to a reduction in the debtor's positive assets. When the secondary debtor has sufficient property to repay the debt, even if the debtor waives the secured claim, it will not lead to a reduction in its liable property.

3. Judgment of the fraudulent nature of the debtor gratuitously transferring property. The debtor's gratuitous transfer of property will inevitably lead to a reduction in its own positive assets. Gratuitous transfer of property includes both purely gratuitous transfer of property and disguised gratuitous transfer, such as the debtor and the counterparty fabricating debts and reaching an agreement to offset debts with property.

4. Judgment of the fraudulent nature of maliciously extending the due date of a claim. Maliciously extending the due date of a claim will also affect the realization of the creditor's claim to a certain extent. The extension of the due date prevents this part of the property from being "in the account," resulting in a substantial reduction in positive assets. It is worth noting that here, the debtor's "malice" is required. To determine whether the debtor has "malice," it is necessary to consider not only the extension behavior but also the purpose of the extension, to comprehensively judge its "malice." If the debtor extends the due date of the claim, but the secondary claim still matures before the creditor's claim, the debtor's liable property will not be reduced, and the debtor's malice is excluded.

5. Judgment of the fraudulent nature of transferring property at a clearly unreasonable low price or accepting property at a clearly unreasonable high price. In this case, although the debtor receives consideration from the counterparty, the consideration is unreasonable.

According to Article 42 of the Judicial Interpretation of the General Provisions of the Contract Law of the Civil Code, for the "clearly unreasonable" low or high prices stipulated in Article 539 of the Civil Code, the people's court shall make a determination based on the judgment of general operators in the place of transaction and with reference to the market transaction price or price guidance price of the place of transaction at the time of transaction. If the transfer price does not reach 70% of the market transaction price or guidance price of the place of transaction at the time of transaction, it can generally be considered as a "clearly unreasonable low price"; if the acceptance price is more than 30% higher than the market transaction price or guidance price of the place of transaction at the time of transaction, it can generally be considered as a "clearly unreasonable high price."

Note that the judgment of "clearly unreasonable price" mainly compares the acceptance or transfer price with the market price or departmental guidance price of the place of transaction at the time of the transaction.

6. Judgment of the fraudulent nature of the debtor providing guarantees for the debts of others. The debtor providing guarantees for others is mostly gratuitous guarantee. Even if it is a compensated guarantee, there is no reasonable consideration. Therefore, whether compensated or not, if the debtor cannot repay the debt but provides a guarantee for others, it will lead to a reduction in liable property, and the creditor may rescind. If the creditor provides a guarantee for its newly generated debt, because it has inevitably obtained corresponding consideration, the debtor's liable property has not been reduced, and its behavior is not fraudulent, and the creditor has no right to rescind.

(3) The debtor's disposition of property affects the realization of the creditor's claim

Whether the debtor's disposition is gratuitous or compensated, it must affect the realization of the creditor's claim, and only then does the creditor have the necessity to exercise the right of rescission. That is, there is a causal relationship between the debtor's fraudulent behavior and the realization of the creditor's claim. If the debtor's property is more than enough to repay all debts, then even if its property is reduced, it will not harm the realization of the creditor's rights. In specific judgment, it should be noted that the debtor's "insolvency" runs through the disposition and the exercise of the right of rescission. If the debtor disposes of property, but later, due to economic improvement, its liable property increases enough to repay the debt, the creditor may not exercise the right of rescission.

(4) The counterparty has subjective malice in compensated disposition

Compensated behavior requires the counterparty to have subjective malice, because in this case, the interests of both the creditor and the bona fide counterparty must be considered. In judicial practice, the presumption principle is generally adopted. Transferring or accepting property at a clearly unreasonable price is obviously in an abnormal transaction state, and the counterparty should also know that this kind of transaction will inevitably reduce the debtor's property. In this case, it can be presumed that the counterparty knows or should know that the disposition will affect the realization of the creditor's claim, and thus it is determined that the counterparty has subjective malice.

Procedural Points of Creditor's Right of Rescission Disputes II

(1) Determination of the litigation status of the parties

According to Article 44 of the Judicial Interpretation of the General Provisions of the Contract Code of the Civil Code, the creditor should sue both the debtor and the counterparty as co-defendants. The case should be under the jurisdiction of the people's court where the debtor or the counterparty is domiciled, except where exclusive jurisdiction is applicable by law.

When a creditor brings an action for rescission, both the debtor and the counterparty should be named as co-defendants. This provision has multiple implications, considering both substantive justice and procedural efficiency. From the perspective of protecting the legitimate rights and interests of all parties, on the one hand, for the creditor, listing the debtor and the counterparty as co-defendants builds a solid litigation framework for the creditor's debt relief. On the other hand, the counterparty has the right to clarify its good faith and lack of knowledge of the transaction process in response to the creditor's accusations, thereby protecting its legitimately acquired rights. From the perspective of optimizing the allocation of judicial resources, if the creditor only sues the debtor and then sues the counterparty separately, it will inevitably lead to multiple rounds of litigation arising from the same dispute, resulting in the repeated use of limited judicial resources.

(II) Whether the action for rescission and the action for debt can be tried jointly

To encourage creditors to exercise their right of rescission, Article 46, paragraph 2, of the Judicial Interpretation of the General Provisions of the Contract Code of the Civil Code stipulates that a creditor may bring an action for debt against the debtor at the same time as bringing an action for rescission, and if both fall under the jurisdiction of the same people's court, they may be tried jointly.

(III) The time limit for a creditor to exercise the right of rescission

According to Article 541 of the Civil Code, the right of rescission shall be exercised within one year from the date on which the creditor knew or should have known the reason for rescission. If the right of rescission is not exercised within five years from the date of the debtor's act, the right of rescission shall be extinguished. Both the “one-year” and “five-year” periods are extinctive prescription periods and are not subject to suspension, interruption, or extension. It should be noted that the exercise of a creditor's right of rescission is subject to both of the above extinctive prescription periods. Even if the creditor exercises the right of rescission within one year of knowing or should have known the reason for rescission, if five years have passed from the date of the debtor's act, the right of rescission shall be extinguished by law.

Reference Cases

Reference Case 01

Shenzhen XXX Data Technology Co., Ltd. v. XXX Electric Appliances (Shenzhen) Co., Ltd., Wuxi XXX New Materials Technology Co., Ltd. Creditor's Right of Rescission Dispute Case

【Judgment Summary】: Ⅰ. If a company uses its property to repay a shareholder's debt, and the transferee of the property pays the property consideration in a way that extinguishes the original debt, the company's repayment behavior does not constitute a statutory case of gratuitous disposal of property rights. If the transferee of the property does not know or could not have known that this behavior would affect the creditor's ability to realize its claims, the people's court will not support the creditor's exercise of the right of rescission. Ⅱ. If a company repays a shareholder's debt without a resolution procedure, and the counterparty does not conduct a reasonable review of the company's resolution procedure, the repayment behavior is not effective for the company, but the company or other shareholders have the right to choose whether to ratify it. The right to claim that the behavior is not effective should belong to the company or other shareholders, and the company's creditors have no right to claim it on their behalf.

【Case Number】: (2022) Su02 Min Zhong 983

Reference Case 02

XXX Asset Management Co., Ltd. Guangxi Branch v. Qin Moumin, Nanning XXX Enterprise Investment Group Co., Ltd., etc. Creditor's Right of Rescission Dispute Case

【Judgment Summary】: A reduction in the debtor's shareholding ratio does not necessarily reduce the value of the property corresponding to its shareholding, nor does it affect the debtor's ability to repay the value of its shareholding. If a creditor requests the rescission of a capital increase and expansion on the grounds that the debtor, using its controlling shareholder status, completed a capital increase and expansion of the company it controlled, resulting in the dilution of the debtor's equity and harming the realization of its claims, this does not constitute a statutory case for the creditor to exercise the right of rescission, and the people's court will not support it.

【Case Number】: (2022) Gui Min Zhong 211

Reference Case 03

XXX Fund Company v. Nanjing XXX Co., Ltd., etc. Creditor's Right of Rescission Dispute Case

【Judgment Summary】: As a preservation system for creditor's rights, a creditor's right of rescission aims to reasonably maintain the debtor's responsible property, thereby ensuring that the creditor's claims can be realized. If a debtor's liabilities exceed its assets and it still provides large amounts of guarantees externally, affecting the creditor's ability to realize its claims, and if the debtor and its counterparty cannot explain the necessity and legitimacy of the guarantee, nor can they explain the reasonableness of the guarantee decision-making process and transaction process, the people's court should support the creditor's request to rescind the above-mentioned guarantee behavior.

【Case Number】: (2018) Su Min Zhong 51

Lawyer Profile

Chen Xia, Lawyer, Bachelor of Law, Nankai University; Master of Law, Heilongjiang University; Director of Heilongjiang Dadi Law Firm. With 32 years of practice experience and senior legal expertise, her practice areas cover finance, securities, private equity financing, mergers and acquisitions, construction real estate, PPP, state-owned enterprise reform, transportation engineering, and more. She currently serves as a member of the Construction and Real Estate Business Committee of the All-China Lawyers' Association; a member of the Heilongjiang Provincial Committee of the Chinese People's Political Consultative Conference; a member of the Heilongjiang Provincial Committee of the China Democratic National Construction Association; director of the Social and Legal Affairs Committee of the Heilongjiang Provincial Committee of the China Democratic National Construction Association; an arbitrator of the Harbin Arbitration Commission; an arbitrator of the Korea Commercial Arbitration Commission; an arbitrator of the “Belt and Road” Wuhan Arbitration Institute; a member of the Heilongjiang Provincial People's Government Administrative Review Expert Committee; a member of the Harbin Municipal People's Government Administrative Review Expert Committee; and was named one of "China's Top 60 Construction Lawyers" by ENR magazine and Construction Times; and an arbitrator of the Wuhan Arbitration Commission.

Pan Hongjing, Lawyer at Heilongjiang Dadi Law Firm, specializes in handling civil and commercial disputes and corporate legal affairs. In her work, she treats people sincerely, is committed to upholding the dignity of the law, fully protects the legitimate rights and interests of the parties, and strives to ensure that every case receives a fair and just outcome.