A Long-Overdue Legal Change Will Save Married Chinese From Debt

2018-02-07 03:10:46

In recent years, many Chinese have fallen into debt paying off their spouse’s personal loans. Perhaps the best-known example is the case of Li Ming, founder of Beijing Galloping Horse Media Co. Ltd., a television and film production company. In 2011, Li signed a valuation adjustment mechanism agreement with an investment company attached to China Construction Bank International, meaning that if Galloping Horse did not get listed on the stock exchange by the end of 2013, then Li would have to return the investors’ money.

Unfortunately, Galloping Horse did not get listed, and Li died from a heart attack shortly afterward. In a legal indictment, the investment company demanded that Li’s widow, Jin Yan, assume responsibility for paying back the debt. A Beijing court agreed and ordered Jin to repay 200 million yuan ($31 million).

Though some decried the ruling as unjust, it was nonetheless perfectly legal. Article 24 in the second judicial interpretation of China’s marriage law, enacted in April 2004, stipulated that if a creditor demanded payment of a loan taken out by an individual in their own name, and the debtor was married at the time, then the debt should be jointly managed by both spouses.

This particular judicial interpretation was ostensibly designed to prevent couples from intentionally evading loan repayments. Back in the 1990s and early 2000s, there were several high-profile cases of married individuals who took out loans, transferred all joint property from the name of the debtor to their spouse, and then divorced them. The debtor thus owned no property and was unable to repay the loan, while their spouses could claim to have known nothing about the loan before the divorce, and thereby exempt themselves from the debt. None of this was against the law.

Yet Article 24 had a number of pitfalls, too. Often, individuals were forced into shouldering the debt because their spouses’ business ventures failed, or took out loans knowing that they could endanger the financial stability of other family members. As a result, many legal experts recommended its amendment, and some women who were forced to pay back their husbands’ or ex-husbands’ debts created a group on China’s ubiquitous messaging app WeChat to lobby for a change in the interpretation of the law.

Article 24 allowed individuals to borrow recklessly, then pull their oblivious spouses underwater with them.

I have taken on a number of such cases myself, though I will protect my clients’ right to anonymity here. Last year, the husband of a female nurse took out a high-interest loan of more than 2 million yuan during a business venture. Later, when he lost funding for his enterprise, the husband vanished overnight; his whereabouts remain unknown. Last year, the creditor took this woman to court, demanding that she pay back her husband’s debt. She approached me for advice several times, complaining that the law was unfair. Why, she asked, must she take on several million yuan of debt simply because of she’s married to the debtor? What’s more, she, just like the creditors, had no idea where her husband was. But unfortunately, I was powerless to help her: The law, after all, is the law.

In another case, a woman’s husband was arrested and detained by police because the small business he owned had been evading tax. As he could no longer work, the company was unable to pay off its debts, so the creditors took him and his wife to court. To play for time, I raised an objection at the preliminary hearing, claiming that the court had no jurisdiction to rule on the case. As a result of the delay, the creditors targeted the loan guarantors instead and abandoned their lawsuit against the couple. It was a strategic victory, but only because I was able to thwart the interpretation through the use of alternative legal tactics.

The final case had far more twists and turns. A woman came to me to discreetly collect evidence after she discovered that her husband had been having an affair. If we then filed for divorce, we could ask the court to freeze the accounts of her husband’s company. This, in turn, would have threatened the company’s operations, and forced the husband to share a greater portion of his assets with her in return for unfreezing the accounts.

Unfortunately, her husband had planned for just such an eventuality. His company’s legal advisors told him to use company property as collateral to secure a 5 million-yuan mortgage from the bank. This would place his family in a huge amount of debt, one that would likely have been unpayable if the couple divorced and the court held her equally liable for the repayments. In the end, my client accepted a 2 million-yuan settlement and the couple did split up.

Traditional Chinese beliefs hold that husband and wife are innately bound by shared interests. But today, marriage is no longer an unbreakable union.

All these cases demonstrate that Article 24 allowed individuals to borrow recklessly, then pull their oblivious spouses underwater with them. In addition, as the majority of business owners in China are men, it was usually women who are most affected by their husbands’ malfeasance.

It is patently unjust that innocent people have to shoulder crippling debts just because they are in a conjugal relationship with someone. That is why the Legislative Affairs Commission of the Standing Committee of the National People’s Congress— the body with the power to recommend amendments to the country’s laws and regulations — received so many letters calling for the regulation to be re-examined. Because of this, on Jan. 17, the Supreme People’s Court issued a new judicial interpretation that made Article 24 a thing of the past. Under new regulations, a loan will only be considered a joint entity when it is used by the couple in their shared life, for joint ventures, or when both parties express a desire to use the money for a shared interest.

But the annulment of Article 24 was not met with unanimous approval by all legal experts. Originally, the legislative intention behind it was to stop the evasion of debt repayment by means of sham divorces. But now, it is sometimes hard to judge whether both parties have expressed a shared interest when they take out the loan. It is possible that the legal rights and interests of creditors will be undermined as a result.

The change in the law reflects changing attitudes towards marriage and family. Traditional Chinese beliefs hold that husband and wife are innately bound by shared interests. But today, marriage is no longer an unbreakable union and both partners may have sharply divergent interests. The practice of taking out loans in one’s own name — and not that of the couple — is another indicator of this societal shift. As the concept of the family changes in China, the law, too, must move with the times.

Translator: Owen Churchill; editors: Lu Hua and Matthew Walsh.

(Header image: E+/VCG)