Intersecting criminal and civil liabilities are common in civil and commercial cases. Based on a case study, this article outlines the procedural co-ordination in the courts’ handling of such cases.

Case study

Company A, unaware of individual B’s actual control of companies C and D, made a joint investment in 2011 with C and D to establish a project company for external investment. In this process, company A lent RMB32.98 million (USD4.63 million) to the project company, and an additional RMB9 million to company D.

Then, in 2018, company A filed separate lawsuits against the project company and company D for loan repayment, only to find that individual B had fabricated a debt between company D and another company, E, also under B’s control.

B was found to have abused his position as the chair and legal representative of the project company to fake the debt, using all assets of the project company as collateral in attempting to transfer all the assets of D and the project company to E.

Company A claimed that individual B had deliberately concealed his actual control over companies C and D, fabricated a debt through these affiliated companies, and drained the resources of company D and the project company, infringing on company A’s legitimate property rights and interests in both entities, which constituted suspected fraud.

Company E initiated two arbitrations against the project company. After obtaining the arbitration awards, E petitioned for the project company’s bankruptcy and declared the creditor’s rights. The project company had been insolvent since 2018, with shareholders unwilling to invest further.

Following the court’s declaration of the project company’s liquidation, E filed a claim for creditor’s rights based on the arbitration awards, which was subsequently confirmed by the bankruptcy administrator.

The dispute, which began in 2018, lasted until 2023, when the court transferred records of company E’s claim for creditor’s rights to the public security authorities. Throughout this period, companies A and E initiated a number of civil and criminal lawsuits, whose legal relationships were intertwined.

While suing the project company and company D for loan repayment, did company A have the right to report individual B’s alleged fraud to the public security authorities? In the presence of both the civil litigation and criminal charges, would the court either suspend or dismiss company A’s two lawsuits concerning loan dispute under the principle of “criminal proceedings preceding civil proceedings”, thereby delaying the confirmation of company A’s claims?

While the public security authorities were investigating allegations of individual B’s fraud against company A, company E obtained false arbitration awards based on fabricated facts, subsequently petitioned for the project company’s bankruptcy, and declared the creditor’s rights that was also later confirmed by the bankruptcy administrator. In this situation, could the court, on the grounds of suspected criminal liabilities, transfer the case materials to the public security authorities in the derivative lawsuit of bankruptcy claim confirmation?

Legal provisions

Since the Supreme People’s Court issued the Provisions on Several Issues Concerning the Handling of Suspected Economic Crimes in the Trial of Economic Disputes in 1998, “the same legal fact” and “the same legal relationship” have served as the fundamental criteria for the procedural co-ordination of cases concerning both criminal and civil liabilities.

The rule of “criminal proceedings preceding civil proceedings” dictates that when the same legal fact involves both a criminal offence and a civil dispute, the criminal case should be resolved first, followed by the civil case.

The rule of “criminal proceedings paralleling civil proceedings” states that when the legal facts and legal relationships underlying the criminal proceedings and the civil proceedings are relatively independent, both proceedings can be conducted separately.

Analysis

A’s loan dispute cases against the project company and D paralleling A’s fraud accusation against B. In the lawsuit, the project company, D and B argued that the public security authorities had initiated a criminal investigation into B’s alleged fraud against A, and that the defrauded assets were derived from A’s loans to the project company and D. Therefore, they held that the loan dispute cases should be dismissed based on the rule of “criminal proceedings preceding civil proceedings”.

The court determined that the two loan dispute cases, although related to the alleged fraud case, had different concerning parties and underlying legal relationships from the criminal complaint. Based on the rule of “criminal proceedings paralleling civil proceedings”, the court proceeded with the two loan dispute cases during the criminal investigation period and ruled in favour of A’s claims.

A’s fraud accusation against B preceding A’s petitions for nullifying the loan contract between E and D, as well as the pledge contract on receivables between E and the project company. The court found that the loan contract and the pledge contract in the two civil lawsuits were key evidence in A’s criminal complaint against B. Therefore, based on the rule of “criminal proceedings preceding civil proceedings”, the court dismissed A’s petition and transferred the case material to the public security authorities on the grounds that the petition cases were involved in a suspected criminal case.

A’s fraud accusation against B preceding A’s petition to nullify E’s declared creditor’s right. The court determined that the claim for creditor’s rights filed by E was the same as the one under criminal investigation by the public security authorities. Therefore, based on the rule of “criminal proceedings preceding civil proceedings”, the court dismissed A’s petition and transferred the case material to the public security authorities on the grounds that the petition case was involved in a suspected criminal case.

Takeaways

In judicial practice, when the court detects clues to an economic crime during the trial of an economic dispute case, it generally does not directly transfer these clues to the public security authorities, regardless of whether they are based on “the same legal fact” as the civil case. In the case study, the court repeatedly transferred case material to the public security authorities only after they had initiated a criminal investigation into B’s actions.

In the case of fraud in business operations, it is crucial to exhaust all available measures in both criminal and civil procedures.

In the case study, B used affiliated companies under his control to commit fraud and engage in false litigation. Such approaches were covert, blurring the lines between civil fraud and criminal fraud.

After detecting B’s intentions, A sued the project company and D for loan repayment and reported the crime to the public security authorities at the same time. This led to a criminal investigation, and the court eventually transferred the case material of E’s claim to the authorities, thwarting B’s plans.