How to determine the order of repayment of principal, interest, liquidated damages, etc. when the debtor pays back the money?

Author | Hongyan Lawyers Team, Lawyer Chen Ruitan

Article 561 of the Civil Code stipulates that "the debtor shall pay interest and relevant expenses for the realization of the creditor's rights in addition to the performance of the main debt. If the payment is not sufficient to settle all the debts, unless the parties agree otherwise, the following shall be followedorderPerformance: (1) the relevant expenses for realizing the creditor's rights; (2) interest; (3) the main debt ".

From this, it can be seen that when the contract does not clearly stipulate the order of debt repayment, the debtor's repayment should give priority to the repayment of interest. However, except for the "loan interest" in the loan contract, the expressions of interest in other contracts are mostly liquidated damages arising from overdue performance of contractual obligations. For example, liquidated damages for delayed performance, in addition to compensating for losses, such liquidated damages also have certain punitive properties.

So, are liquidated damages "interest"? Can they be paid before the principal?

Interest precedence in loan contract

In the loan contract, the borrower and the borrower do not clearly stipulate whether the borrower should repay the principal first or the interest first. According to the provisions of Article 561 of the Civil Code, the principle of "interest first and then capital" is generally handled.

case

Li Moumou v. Zhang Moumou and He Moumou in a private lending dispute

The court's opinion: when the debtor repays in installments, if it is not specified whether to repay the principal or interest of the loan, according to the law, the debt should be calculated one by one according to the repayment time and amount of each payment, and the remaining part after deducting the interest should be used to deduct the principal.

- (2021) Heimin Shenzi No. 1781

case

Li Miao and Shanghai Ruihua (Group) Co., Ltd. and other private lending disputes

The court held that the two defendants and Shuai Hongyuan paid a total of 17.05 million yuan to the plaintiff. The plaintiff and the defendant Suo Li Company did not make a clear agreement on the order of payment. Therefore, according to the law, the payments made by the two defendants should be offset against expenses, interest, and main debts in sequence. The law stipulates that the interest in the order of offset should include agreed interest and statutory interest, even if it is delayed performance interest.

Therefore, the 17.5 million yuan paid by the two defendants and Shuai Hongyuan should first be deducted in chronological order from the interest that has occurred during the period and the interest loss on overdue payments. Regarding the two defendants' argument that the purpose of the payment stated on the payment voucher should be used as the basis for the nature of the payment, this court holds that the content stated on the payment voucher is the unilateral intention of the payer, and the plaintiff has not clearly recognized it. The plaintiff and the defendant Suoli Company have not reached an agreement on the nature of the repayment. Therefore, this court does not recognize the above arguments of the two defendants.

- (2020) Shanghai 0109 Minchu No. 18254

The borrower fails to repay the loan according to the agreed period, which constitutes a breach of contract, and should pay overdue interest in accordance with the agreement or relevant laws. Therefore, overdue interest is a liquidated damages in nature, and the main purpose is to make up for the interest loss during the borrower's overdue repayment period. In judicial practice, the mainstream view holds that both overdue interest and borrowed interest can be deducted before the principal amount. For example, Article 25 of the "Guiding Opinions of the Higher People's Court of Zhejiang Province on Several Issues Concerning the Trial of Private Loan Dispute Cases" stipulates that "when the debtor's payment is insufficient to settle all the debts, it shall be offset in the following order: (1) Relevant expenses for realizing the creditor's rights; (2) Interest or liquidated damages; (3) Borrowing principal."

Therefore, in a loan dispute, if the debtor repays in installments, the interest (including overdue interest) will be paid first, and then the principal will be deducted, and then the remaining principal will continue to calculate the interest.

Interest on liquidated damages in other contracts

Except for loan contracts, in other contract disputes, if the debtor's payment is not enough to pay off all the debts, the judicial judgment generally believes that the principal should be set off first. For example, in the "Chongqing High Court's Answer to Several Legal Application Issues in the Trial of Sales Contract Disputes (1) ", if the parties do not agree on the order of set-off of the payment, the payment should be set off against the principal of the payment owed to them first, and then against the liquidated damages.

case

Cai Huilin and Li Zhongjin Equity Transfer Dispute Retrial Case

The court's opinion: Liquidated damages refer to the provisions of the law or the agreement of the contract. When one party breaches the contract, it should pay a certain amount of money to the other party, which has the dual nature of compensation and punishment. The concept and nature of liquidated damages and interest are different, and the order of liquidated damages cannot be applied to the provisions of Article 21 of the original Interpretation of the Contract Law II.

The case involved "Cooperation Land Acquisition Agreement" did not stipulate the order of liquidated damages and equity transfer payments. Cai Huilin and Li Zhongjin argued that there is no contractual basis and legal basis for the first repayment of liquidated damages, and this court does not support it.

- (2020) Supreme Court Minshen No. 1437

case

Yueyang Yufeng Real Estate Development Co., Ltd., Lu Yuexing Contract Dispute Retrial Case

The court's opinion: Yufeng Company failed to pay the demolition compensation to Lu Yuexing at the agreed time, and the "interest" that should be paid in the "Payment Supplementary Agreement" was essentially a liquidated damages. Due to the fact that liquidated damages are based on the provisions of the law or the agreement of the contract, when one party breaches the contract, it shall pay a certain amount of money to the other party, which has the dual nature of compensation and punishment, and the concept and nature of interest are different. Therefore, the order of liquidated damages cannot be applied to the provisions of Article 21 of the Interpretation of the Contract Law on offsetting according to the order of relevant expenses, interest and main debts for the realization of creditor's rights. second-instance determined that the amount paid by Yufeng Company should first pay off the liquidated damages according to the above provisions, which is an error of applicable law.

- (2021) Xiang 06 Min Zai No. 116

When hearing a contract dispute case, the court held that interest is the reward obtained by the owner of the funds for lending funds, which belongs to the statutory fruit of the main debt and is subordinate to the main debt, and liquidated damages are the liability for breach of contract caused by the debtor's breach of contract, which has the functions of compensating for the creditor's losses and punishing the defaulting party. They are relatively independent of the main debt, that is, interest and liquidated damages are not the same in connotation and nature, so the order of liquidated damages is not applicable to Article 5

61of the Civil Code.

Therefore, in loan contract disputes, the debtor's payment can be deducted from interest first, including overdue interest during the delay period, and then deducted from the principal. In other contract disputes, the liquidated damages arising from the debtor's breach of contract cannot be deducted before the principal.

During the performance of the contract, when the debtor's payment is insufficient to settle all the debts, whether the order of settlement is based on "interest first and then principal" or "first principal and then interest" has a great impact on the calculation of the total amount of debt. In order to clarify the rights and obligations of all parties and protect their own rights and interests, the parties may clearly stipulate the order of debt settlement in the contract.

For the creditor, it may be agreed that the amount paid by the debtor shall be deducted first from the necessary expenses (including attorney fees, notary fees, communication fees, transportation fees, litigation fees, etc.) paid by the creditor to realize the creditor's right, and then deducted from interest and liquidated damages, and finally deducted from the principal. For the debtor, it is more beneficial to reduce the main debt, and it may be agreed that the principal amount shall be deducted first, and then the interest or liquidated damages shall be deducted.

Lawyer Profile

Lawyer Chen Rui < unk >

Practicing lawyer of

Guangdong

is a full-time practicing lawyer, focusing on civil and commercial legal affairs and corporate legal affairs. He is good at handling legal affairs such as equity, contracts, marriage and family affairs. He has served as a corporate legal consultant for many years and has rich theoretical research and practical experience.

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The Hongyan lawyer team is headed by lawyer Liu Hong, and is composed of lawyer Min Na, lawyer Chen Ruitan, lawyer Wang Ting, and lawyer Zhou Gaofeng as the backbone of the business. The team members are handsome and have their own advantages; their business literacy is stable and solid, and they have profound experience in the industry. They abide by professional ethics, focus on business practice, integrate knowledge and practice, and constantly achieve far-reaching goals.

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