The Supreme People's Court of China recently issued an interpretation on how to calculate the interest accrued on delayed payment – Interpretation of the Supreme People's Court of Several Issues Concerning the Applicable Law for Calculating Interest On Delayed Payment in the Enforcement Action (FaShi [2014] No.8).

The Interpretation made a clear distinction between General Interest and Penalty Interest, provided guidance on when and how to calculate Penalty Interest, including interest payment in foreign currency.

According to this interpretation, the interest accrued on late payment has two components: (i) interest agreed between the parties under the contract and recognized by the court ("General Interest") and (ii) penalty interest provided by the statute ("Penalty Interest").

If the contract between the parties did not provide for any interest on the late payment, or the court fails to recognize the interest stipulation, plaintiff is not entitled to collect the General Interest from defendant.

Under the prior regulation, the court applies two times the benchmark loan interest rate published by the People's Bank of China to calculate the Penalty Interest.  In this Interpretation, the court forfeited this standard and adopted a fixed rate of 0.0175% per day, with reference to the prevailing benchmark loan interest of 6.4% per year to calculate the Penalty Interest. The interpretation provides that only the outstanding principal amount is subject to Penalty Interest, not the amount of General Interest. The formula for calculating Penalty Interest is as follows: Outstanding principal amount x 0.0175% x Number of delinquent days.

The Penalty Interest starts to accrue from the first day following payment due date or the effective date of the court verdict if the verdict does not provide for such due date.  The penalty interest is calculated up to the date of appropriation in the case of deposit, or the date of completion of the transaction in the case of auction or disposition of defendant's property to satisfy its payment obligation.  The Penalty Interest will be tolled during the suspension of the enforcement action provided such suspension is not due to the reason of defendant.

The asset of the defendant should be used to satisfy the outstanding principal amount first if defendant does not have sufficient asset to satisfy all its debt obligations i.e. principal and interest, unless the parties have specific agreement on the payment priority.

If the payment obligation is denominated in foreign currency, plaintiff can elect to have the Penalty Interest paid either in foreign currency or Renminbi. For payment in Renminbi, the foreign exchange rate published by the China Foreign Exchange Trade System on the due date of the Penalty Interest will be applied to convert foreign currency to  Renminbi. The interest rate of the Penalty Interest paid in foreign currency is same as that of Renminbi payment i.e. 0.0175% per day.