The Legal Categorization And Effect Of “the Loans Disguised As Finance Leases”

The Loans Disguised as Finance Leasesrefers to the transactions with the form of the finance leases and true intention of the loans.The most typicalis the fictitious leasehold.Legal categorization,the effectiveness of transactions/guaranties and the obligations between the parties are there key issues ofthe Loans Disguised as Finance Leases.Firstly,the legal categorization is a judicial method through which the courts classify the transactions by analyzing the main courses of the contracts and the performance and by digging the backgrounds.The Fictitious leasehold is categorized as a loan instead of a finance lease.Secondly,the categorization exerts no power on the effectiveness of the transactions,since they are independent from each other.Normally,unless otherillegalscenarios exist,the Loans Disguised as Finance Leasesare effective civil transactions,which does not violate the compulsory provisions of laws and administrative regulations,and also does not constitute malicious collusions or illegitimate purposes concealed under the guise of legitimate acts either.Thirdly,the identity of the transactions remains regardless of the categorization.Unless otherwise stated,the guarantees cannot get rid of liabilities on account of the categorization or they did not know the legal categorization at the time of signing the guarantee letters.The effectiveness of the guaranties remains unless one of the following circumstances exists: the joint fraud of the guarantors and beneficiaries,the fraud of the beneficiaries while the guarantors know the fact and the fraud/coercion of the guarantors.Fourthly,the courts must figure out the principal and interest rate in the Loans Disguised as Finance Leases based on the laws of the loans,rather than the laws of the finance lease.The margin or the down payment,which is common in the contracts of the finance lease,should be deducted if it does not conform to a legal pledge over cash.The court should decide the principal and interest rate,according to the related contract clauses thatimply the lease rate or the internal rate of return.The Loans Disguised as Finance Leases also refers to the transactions in which either side has true meanings of the finance lease though the object is real.The effectiveness of the non-typical security interest clause or the chattel mortgage of the object in the transaction is in doubt.There is another controversy over the distinctions between the finance lease and the Loans Disguised as Finance Leases.How to tell if there is any true intention of the finance leases on the basis of the clauses and performances in some hard areas?The finance leases are transactions that center on the leaseholds and characterized by the ownership of leasers and lesseesare entitled to the specification and usage of the leasehold.There are four requirements of a finance lease in the light of the law: one,the real existence of the leasehold;two,the lessees are entitled to specify and use the leasehold;the ownership of the leasers;four,the value of the leasehold matches the rent.The key components of finance lease and the result of the Loans Disguised as Finance Leases now has been clarified.The basis of the conclusions is the article 1 of the Interpretation of the Supreme People's Court on Issues concerning the Application of Law in the Trial of Cases Involving Disputes over Financial Leasing Contracts,comprised of the rule of categorization of the finance lease and the processing of the Loans Disguised as Finance Leases.The rule of categorization,which is featured as openness and modesty,unifies and simplifies the judicial basis.It makes case by case comparison/analogy and ad adsurdreasoning possible and easier.The rule,inherited from laws such as the General Provisions of the Civil Law of the People's Republic of China or the Contract Law of the People's Republic of China,provides basis for the judicial independence and fair rulings.The court should stick to legal rules,rather than the accounting standards,tax rules and administrative regulations.As for innovative transactions,the courts must be prudent and take it as loans if it does not meet the legal requirements for the finance lease.The rule of processing is a combination of the categorization and interpretation.It is also a fruit of judicial intelligence and experience.The court is thus able to adjust the obligations,cut down the side-effect of usuries and provide guidelines for the industry.The courts possess enormous power before the Uniform Law of the Finance Lease enacts,which also means,bears crucial responsibilities to broaden the horizons of the whole judicial system and the industry.