We examine empirically whether internal corporate governance mechanisms play a role in reducing the probability of being sued by lending banks due to bank loan default and the market reaction to the announcement of bank loan litigation. Using bank loan litigation events in Chinese financial markets, our results show that companies with better internal corporate governance mechanisms are associated with a lower probability of being sued. We also find a significant negative market reaction to the announcement of a bank loan filing while insignificant market reaction to the announcement of bank loan litigation verdict. Moreover, we test whether internal corporate governance mechanisms can play a role in mitigating the effect of market reactions. Our findings indicate that there is no evidence of internal corporate governance in mitigating this effect. Our paper suggests that internal corporate governance mechanisms are important in preventing the trigger of external governance mechanisms (litigation) but do not play any role once external governance (litigation) takes over.