{"id":2926,"date":"2026-06-23T17:00:50","date_gmt":"2026-06-23T09:00:50","guid":{"rendered":"https:\/\/www.zhenghan.com\/case\/2926.html"},"modified":"2026-06-23T17:00:50","modified_gmt":"2026-06-23T09:00:50","slug":"turning-the-tide-zhenghan-law-firm-resolves-the-1-dot-5-billion-yuan-circular-fund-transfer-rashomon-effect","status":"publish","type":"case","link":"https:\/\/www.zhenghan.com\/en\/case\/2926.html","title":{"rendered":"Turning the Tide: Zhenghan Law Firm Resolves the 1.5 Billion Yuan “Circular Fund Transfer” Rashomon Effect"},"content":{"rendered":"

In a financial loan dispute involving over 2.5 billion yuan that should have been “without suspense,” the court of first instance dismissed all claims of the financial institution on the grounds of “circular fund transfers.” Zhenghan Law Firm was “appointed at a critical moment” four days before the second-instance hearing.<\/strong> Within the extreme pre-trial preparation window, the handling team split into three groups, conducting investigations and gathering evidence across the country. Ultimately, they broke the logic of the first-instance court’s findings, reconstructed the transaction background and purpose, penetrated the fund flows, and integrated cross-disciplinary criminal and civil evidence. This prompted a re-examination of key facts, leading to the case being remanded for retrial, where the tide was finally turned.<\/strong><\/p>\n

Keywords:<\/strong> Financial Loan Dispute, Remand for Retrial, Turning Defeat into Victory, Authenticity of Loan, Circular Fund Transfer, Billion-Level Dispute<\/p>\n

I. Case Background<\/h2>\n

A large-scale cultural tourism real estate project company reached a 15-billion-yuan financing agreement with a financial institution. The debtor provided land mortgage guarantees, the debtor’s minority shareholders provided equity pledge guarantees, and the debtor’s controlling shareholders, actual controllers, and affiliated enterprises provided joint and several liability guarantees and shortfall compensation commitments. Simultaneously, the financial institution acquired part of the equity held by the debtor’s controlling shareholder, becoming one of the debtor’s shareholders.<\/p>\n

Before the loan was disbursed, the project was suspended due to administrative regulatory reasons, some construction procedures were revoked, and project buildings were demolished. However, neither the debtor nor the shareholders requested the financial institution to terminate the loan contract or stop disbursement. The debtor’s controlling shareholder continued to negotiate with the financial institution to proceed with the loan agreement. After the loan was disbursed, the debtor’s controlling shareholder went bankrupt, and the actual controller lost contact. Before the loan matured, the actual controller of the financial institution was placed under investigation by public security organs (for reasons unrelated to this case) and subsequently passed away during the investigation period. After the loan matured, the debtor’s minority shareholders filed a criminal complaint with the public security organs for “misappropriation of funds,” alleging that the 1.5 billion yuan loan had been misappropriated. The public security organs later determined there were “no criminal facts” and revoked the criminal case.<\/p>\n

Upon maturity of the loan, the debtor failed to repay on time, leading the financial institution to file a lawsuit. During the financial loan litigation, the debtor’s shareholders also violated the “Investment Cooperation Agreement” signed by all parties by unilaterally breaking into a safe and seizing the project company’s official seal, which was under joint management by the financial institution. This led to a separate dispute over the return of company certificates and seals (for details, see Battle for the Official Seal: Why Did the Financial Institution Turn Defeat into Victory? | Zhenghan Law Firm<\/a>).<\/p>\n

During the trial of the financial loan case, the actual controllers of both parties either lost contact or passed away, the debtor’s controlling shareholder went bankrupt, and core business personnel from both sides resigned. The accounts of the case provided by the two parties were diametrically opposed, creating a “Rashomon” situation. Our client, the financial institution, argued that the transactions complied with the agreement: except for the 38 million yuan for the insurance fund and the first interest payment, the remaining 1.462 billion yuan was used to repay the debtor’s shareholder loans. This arrangement was either stipulated in the loan contract or resulted from the consensus of both parties’ actual controllers, and was known to the debtor’s other shareholders. Conversely, the debtor and its minority shareholders claimed that because the “project was demolished and the project company had no need for loans,” the financing was not a genuine loan but rather a “circular fund transfer” or “capital idling.” They argued that all funds eventually returned to the financial institution’s affiliated products or enterprises (Fund flow: Financial Institution \u2192 Debtor \u2192 Debtor’s Controlling Shareholder \u2192 Affiliate of Controlling Shareholder \u2192 Financial Institution or its Affiliate), thereby denying that the 1.5 billion yuan constituted a valid disbursement under the Loan Contract and further denying the principal debt and all guarantee liabilities.<\/p>\n

The amount involved in the case exceeded 2.5 billion yuan, including 1.5 billion yuan in loan principal. The court of first instance dismissed all of the financial institution’s claims. After the case entered the second-instance procedure, Zhenghan Law Firm was commissioned four days before the hearing to represent the appeal and subsequent retrial procedures, reconstructing the evidence system around the core facts of the case.<\/p>\n

\"\" Diagram of Legal Relationships Involved (Click to enlarge, same below)<\/span><\/p>\n

\"\"<\/p>\n

Summary Table of “Loan Contracts” between the Debtor and Original Shareholders<\/span><\/p>\n

\"\"<\/p>\n

Summary Table of “Debt Assignment Agreements” between New Shareholders, Original Shareholders and Affiliates, and the Debtor Company<\/span><\/p>\n

II. Key Points and Challenges<\/h2>\n

(I) Multi-layered flow of 1.5 billion yuan: The “authenticity of the loan” faces a fundamental challenge<\/strong><\/p>\n

The 1.5 billion yuan in financing was continuously circulated through the accounts of the project company and multiple affiliated entities within a very short period. From the surface of bank statements, the funds exhibited complex closed-loop circulation characteristics. Based on this, the debtor and related parties raised core defenses such as “the loan never actually occurred” and “the funds just went in a circle and returned to the starting point,” characterizing the case as a typical “circular fund transfer.”<\/p>\n

The core issue was no longer whether the funds had flowed, but how to prove that a “genuine change in creditor-debtor rights” occurred behind the complex fund flow and whether the relevant transactions achieved the “commercial purposes agreed upon in the contract.”<\/p>\n

(II) Project suspension and changes in use trigger disputes over financing validity<\/strong><\/p>\n

Before and after the financing was disbursed, major changes occurred, including the suspension and demolition of the project and the revocation of some construction permits. The debtor and related parties argued that one of the agreed purposes of the financing, “for project construction,” could no longer be achieved, so the financial institution should not have continued to disburse the loan, and subsequent fund flows did not constitute contract performance.<\/p>\n

However, the actual financing contract also stipulated another purpose: “for debt structure adjustment.” Therefore, whether the purpose of “debt structure adjustment” still held independent commercial value after the financial institution knew the project had stalled, and whether the financial institution should have continued to disburse the loan at the debtor’s request, became a major point of contention in the trial.<\/p>\n

(III) Evidence spanning banking, administrative, criminal, and bankruptcy proceedings<\/strong><\/p>\n

This case involved overlapping criminal and civil issues. A minority shareholder had filed a criminal report alleging “misappropriation of funds<\/span>.” The public security organs initiated an investigation and recorded interrogation transcripts, but later closed the case due to “no criminal facts.” Consequently, the core facts and evidence of this case were recorded in criminal files. However, when the original counsel applied to obtain these criminal files, the court of first instance did not agree, resulting in a lack of many factual proofs.<\/p>\n

Additionally, historical transaction documents were scattered across bank statements, bankruptcy records, and administrative files. Evidence from different proceedings was both interrelated and independent. How to reconstruct the true transaction process from a massive amount of fragmented evidence and form a complete chain of evidence became the key to the case’s success.<\/p>\n

(IV) Total loss in the first instance: The challenge of breaking through the existing framework of findings<\/strong><\/p>\n

When Zhenghan Law Firm took over the case, a first-instance judgment extremely unfavorable to the client had already been rendered. How to break through the existing framework of factual findings and re-prove the actual occurrence and commercial purpose of the financing transactions became the key to achieving a reversal.<\/p>\n

III. Highlights of Representation<\/h2>\n

(I) Extreme evidence collection: Penetrating the surface of the 1.5 billion yuan fund flow<\/strong><\/p>\n

Although the handling team was basically able to reconstruct the transaction background through communication with several former business personnel, they were unable to complete the evidence loop with limited materials due to the inability to obtain written evidence.<\/p>\n

Therefore, with only four days left before the second-instance hearing, the handling team split into three groups: Team One went north to investigate the truth behind the closed-loop funds and gather evidence; Team Two applied for an investigation order from the second-instance court and immediately went south to obtain criminal files and bank records; Team Three stayed in Shanghai to simultaneously rewrite the original appeal and prepare evidence for the second instance. Ultimately, both Team One and Team Two completed their investigations and evidence collection within 24 hours, returning with materials that became crucial for us to restore the truth to the court.<\/p>\n

Combining the relevant evidence, the handling team disassembled and reconstructed the fund transfers between multi-layered accounts based on the actual flow path of the 1.5 billion yuan financing. By integrating bank statements, payment approval documents, transaction documents, and third-party materials, they reconstructed the financing purpose and fund use, directly prompting the second-instance court to rule for a remand for retrial.<\/p>\n

(II) Using visualization to present the commercial substance to the five-member collegial bench and explain why financing still held commercial value after the project stalled<\/strong><\/p>\n

After the second instance remanded the case, the court of first instance formed a five-member collegial bench for the trial, and the court investigation was extremely meticulous. Throughout several hearings, the opposing party consistently emphasized that “after the project stalled, the debtor had no financing needs.”<\/p>\n

The handling team systematically organized evidence such as the project’s M history, original shareholder debt assignment agreements, the reasons for financing needs, and meeting minutes regarding debt structure adjustment arrangements. They proved that the core purpose of the financing was “debt structure adjustment,” which served three major goals for all parties:<\/p>\n

(1) Reducing debt financing interest rates through “borrowing new to repay old” (using new shareholder loans to repay old shareholder loans), thereby benefiting the debtor;<\/strong><\/p>\n

(2) Resolving the “triangular debt” of debt assignments among the debtor, old shareholders, and new shareholders;<\/strong><\/p>\n

(3) Enabling the repayment of other urgent debts of the controlling shareholder’s affiliates.<\/strong><\/p>\n

Therefore, the financing was an integral part of the project M and capital operation arrangements from the beginning, which is why all shareholders of the debtor participated in signing the “Investment Cooperation Agreement.” Even if subsequent development of the project was hindered, the core purpose of “debt structure adjustment” always existed.<\/p>\n

IV. Key Points of the Judgment<\/h2>\n

The second-instance court held that key facts of the case had not yet been clarified and ruled to revoke the original judgment and remand the case for retrial.<\/p>\n

During the retrial, the court conducted a comprehensive review of the transaction background, financing purpose, actual use of funds, changes in creditor-debtor rights, and the true intentions of all parties. Instead of simply relying on the surface appearance of fund flows to determine the authenticity of the loan, the court made a substantive judgment on the complex transaction structure.<\/p>\n

Ultimately, the court did not adopt the core defenses of the debtor and related parties regarding “the loan never occurred” or “the loan is invalid due to circular fund transfers.” It determined that part of the funds constituted a valid disbursement under the “Loan Contract” and supported the corresponding principal, interest, overdue interest, breach of contract liability, and costs for realizing the creditor’s rights. At the same time, the court confirmed that the land mortgage provided by the project company, the equity pledge provided by the shareholders, and the joint and several liability guarantees provided by the relevant guarantors were legally established, and supported the realization of security interests within the corresponding scope.<\/p>\n

V. Insights and Value of the Case<\/h2>\n

This case went through a loss in the first instance, a remand in the second instance, and a reversal in the retrial. it revolved around typical disputes in financial adjudication, such as “whether circular fund transfers negate the authenticity of a loan,” “how to determine the validity of financing transactions in the context of a stalled project,” and “how to protect security interests under complex fund flows.”<\/p>\n

The case not only involved a disputed amount of over 2.5 billion yuan but also intertwined complex issues such as project financing, debt structure adjustment, repayment of shareholder debt, realization of security interests, and the use of cross-disciplinary criminal and civil evidence. The court ultimately did not stop at a formal review of fund flows but returned to the substance of the transaction for its judgment.<\/p>\n

This case demonstrates that in large-scale project financing and complex financial transactions, a “closed-loop fund flow” does not naturally mean the loan does not exist, nor does a “circular fund transfer” naturally negate the authenticity of the financing relationship. For enterprises and financial institutions, determining whether a financing transaction genuinely occurred should not be limited to the fund flow itself; instead, one should further examine the ultimate use of funds, the resulting changes in creditor-debtor rights, and whether the transaction purpose was achieved. The determination of legal relationships in complex transaction structures should essentially return to the substance of the transaction rather than the appearance of the funds.<\/p>\n

This case also illustrates that in remanded cases, the outcome is often decided not just by the application of law, but by the ability to reconstruct facts. For complex dispute cases where an unfavorable judgment has already been rendered, the key to achieving a reversal often lies in the ability to reorganize the factual system, integrate evidence across different proceedings, and construct a new adjudicative narrative. By systematically reconstructing the transaction background, fund use, and changes in debt, Zhenghan Law Firm provided an important factual basis for the court to ascertain the true legal relationships, offering significant reference value for resolving large-scale project financing disputes and complex commercial controversies.<\/p>\n","protected":false},"author":3,"featured_media":0,"template":"","meta":{"_acf_changed":false},"case-category":[299,295,308],"case_tag":[368,371,646,647,648,649],"class_list":["post-2926","case","type-case","status-publish","hentry","case-category-provincial-municipal-level","case-category-intermediate-courts","case-category-corporate-investment","case_tag-turning-defeat-into-victory","case_tag-case-remanded-for-retrial","case_tag-circular-fund-transfer","case_tag-financial-loan-dispute","case_tag-authenticity-of-loan","case_tag-billion-level-dispute"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.zhenghan.com\/en\/wp-json\/wp\/v2\/case\/2926","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.zhenghan.com\/en\/wp-json\/wp\/v2\/case"}],"about":[{"href":"https:\/\/www.zhenghan.com\/en\/wp-json\/wp\/v2\/types\/case"}],"author":[{"embeddable":true,"href":"https:\/\/www.zhenghan.com\/en\/wp-json\/wp\/v2\/users\/3"}],"wp:attachment":[{"href":"https:\/\/www.zhenghan.com\/en\/wp-json\/wp\/v2\/media?parent=2926"}],"wp:term":[{"taxonomy":"case-category","embeddable":true,"href":"https:\/\/www.zhenghan.com\/en\/wp-json\/wp\/v2\/case-category?post=2926"},{"taxonomy":"case_tag","embeddable":true,"href":"https:\/\/www.zhenghan.com\/en\/wp-json\/wp\/v2\/case_tag?post=2926"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}