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The New Regulation on the Recognition of Husband and Wife’s Joint Debt Highlights the Deficiency of the Matrimonial Property System in China (I)

date:2019/11/13 Clicks:102
It was published in the 05 edition of legal daily on July 4, 2019
In the second draft ofCivil Code—Marriage and Family Section, the following provisions were added in chapter 3 section 1 "Spousal Relationship": "The debt which is incurred by the husband and wife’sjoint signature or by one of the husband and wife's subsequent ratification, as well as the personal debt which is incurred by one spouse for the daily needs of the family during the marriage, belong to the joint debts of the husband and wife. The debt incurred by one of the husband and wife in excess of the daily needs of the family in the name of an individual during the period of marriage is not a joint debt of the husband and wife. Except where the creditor can prove that the debt is used for the joint life, production and operation of the husband and wife or is based on the common intention of the husband and wife." The newly added stipulation on the recognition of the husband and wife’s joint debt actually absorbed theInterpretation of the Supreme People's Court on Issues Related to the Applicable Law in the Trial of Cases Involving Husband and Wife's Debt Dispute(referred to as interpretation of the lawno. 2 [2018]), andCivil Code - Marriage and Family Sectionmade legislative confirmation of the judicial interpretation.
Such legislation affirms, its positive sense is self-evident. In practice, the public's "panic" about the joint debt of the couple is mainly based on Interpretation of theSupreme People’s Court about Several Problems Concerning the Application of the Marriage Law of the People’s Republic of China (II)(referred to as interpretation of the law No. 19 [2003]). Article 24 of the interpretation of the law stipulates that "During the existence of the marriage, if either the husband or wife files a claim for a personal debt in the name of one party, the debt shall be treated as a joint debt of the husband and wife, unless either the husband or wife is able to prove that the creditor and the debtor have clearly stipulated it as a personal debt or to show that the debt is under any of the circumstance as prescribed in the third paragraph of Article 19 of the Marriage Law." According to this regulation, as long as the debt is real, it should be recognized as the joint debt of husband and wife. The downside of such a rule is that many divorces involve one party, mainly a woman, incurring huge debts for no reason. Some couples even live apart from each other for a long time without economic contact. It's really unfair for one party to get divorced with no joint assets to share and to be saddled with huge debts from the other.
The draft absorbed the provisions of interpretation of the law No. 2 [2018]. In fact, it negated the provisions of article 24 No.19 [2003] in the form of legislative norms. It is effectively reduce the risk of irrational bearing joint liabilities (This risk mainly comes from the operating liabilities of one or both of the husband and wife to engage in production and business activities to obtain income).
However, the legislative declaration value of the recognition of husband and wife’s debt is multi-faceted. The legislation reduces the scope of one party's debt becoming the joint debt of husband and wife, and also increases the audit cost of venture financing in economic activities. Few creditors will voluntarily accept that the loan (or guarantee) is the personal debt of the financier rather than the joint debt of the husband and wife. Having both the financier and the spouse sign the contract is clearly the least costly burden of proof relative to the obligation to prove that the debt is used by the couple to live together or produce and operate together. This means that the law strengthens the protection of the relationship between husband and wife, and also limits the subjective initiative of one or both partners to start a business.
Objectively speaking, individuals who participate in production and business activities are mostly members of a family. Under the new rules of joint debt identification of husband and wife, the success of one spouse in financing depends on whether the spouse agrees. When the creditor lends money (or provides guarantee), to ensure the security of its capital, they will require the spouse of the financing party to sign the confirmation and assume the responsibility of joint repayment (or guarantee). Such requirements are bound to reinforce the spouse's concerns about the profitability of the fundraising and to prevaricate or even explicitly reject them. The result may be that the spouse avoids the risk of debt, but discourages the other spouse from starting a business, potentially leading to a breakup of spousal relationship or even divorce.
In the entrusted affairs I undertake, there are quite a few divorce cases caused by worries about the couple's joint debts, which can be roughly divided into the following two types: 
1. Filing for divorce because the spouse refuses to share the risk. A husband and wife started a company together, with the development of the business, they had opened a number of companies. Later, because of the different management ideas of the husband and wife, they ran companies separately. There was a certain estrangement between the husband and wife but they still live together. Recently, the husband wants to cross the line of business and needs financing. Creditors agreed to borrow money but need the signature of his spouse to guarantee his repayment. The wife did not agree to the investment because she thought it was risky to operate in different fields. Of course, she refused to sign. The husband then filed for divorce and believed that if he got divorce with his wife, he would not need his wife’s signature to invest.
2. One spouse avoids the risk of their spouse taking on joint debt by faking a divorce. An investor has accumulated some wealth. Although there is no debt risk at present, the market risk cannot be controlled. The investor is worried about the business risk which may involve the family in the future. The investor wants to get a divorce as soon as possible, so his wife and child can keep the family's wealth even if the risk of future debt falls on himself.
These two kinds of divorce cases seem to be extreme, but a large number of life. How to correctly grasp the identification standard of husband and wife's joint debt may be a double-edged sword hanging on the relationship between husband and wife and economic activities. The game of safeguarding husband and wife’s relation and safeguarding business activities will appear from time to time inevitably. It is obviously unrealistic to require individuals to engage in business activities by husband and wife's joint signature. The avoidance of joint debt risks of husband and wife may enhance the risks of business activities, bringing more challenges to the relationship between husband and wife and the security of economic activities.
Author of this article:
Mingsheng LU
Chief Attorney of BONBONWU, Partner Attorney of Dentons (China), which consists of 45 offices and spans all of provinces and autonomous regions of China.
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