Improving Chances of Successful Debt Recovery in Mainland China

In today’s global economy, many international businesses suffer from poor payment behaviour, leading to financial problems. Maintaining and protecting cash flow is more crucial than ever. Debt recovery in Mainland China can be challenging for international creditors. Having in-country knowledge and experience of local debt collection procedure can improve recovery prospects and better manage their cash flow.

International creditors can use various tools including lawyers’ letters, asset preservation orders and high consumption restriction orders to place increasing pressure on debtors and successfully recover outstanding debts.

1. Sending a lawyer’s letter may ensure the debtor is aware of the threat of further legal action

Once a debt has arisen and debtors refuse to settle, creditors should engage a law firm to issue a lawyer’s letter, an ultimatum before taking formal legal action.

The lawyer’s letter generally states the facts and legal basis with respect to the dispute, a legal analysis from the lawyer’s point of view, and requires the debtor to pay the debt, or fulfil other obligations within a specified period.

In practice, Chinese debtors tend to ignore a foreign law firm’s demand letter, however they normally take a lawyer’s letter issued by a PRC qualified law firm more seriously. Sending a lawyer’s letter is one of the cost-effective measures to put pressure on debtors. It can often bring the debtor back to the negotiating table. Even if negotiations do not end in a settlement agreement, the creditor may have an opportunity to review the debtor’s evidence, which will help the creditor to be fully prepared for the incoming legal action.  

In addition, sending a lawyer’s letter will allow the limitation period to restart from the time when the letter is served on the debtor. This will give the creditor more time to consider whether to file a lawsuit with the court.

2. Asset Preservation may help the parties to reach a settlement

Some debtors will try their best to transfer assets at an early stage of legal action. Under PRC law, a creditor is entitled to apply to the court to place restrictions on the debtor’s assets. The law also allows the creditor to apply for the preservation of assets before filling the lawsuit, however this is subject to very strict rules. If the court can manage to freeze the debtor’s assets, the creditor’s chances of obtaining a recovery will be greatly increased.

Generally, the court will approve the application if security is provided, such as insurance company’s guarantees, the pledging of cars/houses, etc. This is to prevent illegitimate preservations, which may cause losses to the debtor.

Preserved assets will be frozen for 1 – 3 years, depending on type of assets. The freezing period can be extended until the court issues a judgement, which often takes years in China.

During the freezing period, the assets cannot be sold, transferred and in some cases used. This will clearly create some problems to the defendant, especially when the debtor’s active bank account is frozen. In the situation, the defendant may be eager to reach a settlement with the creditor.

Usually, when filling the asset preservation application, the creditor is obliged to provide specific information on the target assets. In principle, the court will not investigate the debtor's assets, but it may consider doing so if the creditor submits an application with reasonable grounds. When considering an asset preservation application, creditors should ensure that they obtain the following information about the debtor’s assets, e.g. details of bank accounts, addresses of real estates, locations of cars/machinery, etc.

3. A high consumption restriction order may be helpful in obtaining a successful recovery in enforcement proceedings

By law, relevant parties must comply with effective judgements. If the debtor refuses to pay the outstanding debts within the prescribed period, the creditor may apply to the court for enforcement of the judgement. However, enforcing a judgment in Mainland China is not easy if assets have not been frozen in advance, or if the debtor is a small private company.

It is possible for a creditor to win a case and not end up with any payments. During enforcement proceedings, the court will be empowered to investigate the debtor’s assets. When the debtor fails to fulfil the payment obligation under the judgement, and there are no assets available in the debtor’s name for enforcement, the creditor may apply for high consumption restrictions on the debtor or, if the debtor is a company, usually on its legal representative.

The court will consider factors such as whether the debtor has evaded or refused to perform its payment obligations and the financial status of the debtor before making decisions on whether or not to issue a high consumption restriction order. Restrictions many be imposed to restrict a debtor’s ability to book train and airplane travel, take vacations, purchase or rent property or vehicles, educate their children and to purchase insurance or financial products.

However, subject to the court’s approval, for personal affairs, the debtor’s legal representative may be allowed to conduct the above acts.

A high consumption restriction order can be of great help in pressing the debtor to pay. Once the order is issued, it will be hardly possible for the debtor/its legal representative to lead a normal life. The debtor will have to figure out a way to repay the debts or start to pay the debt in instalments so that the creditor may agree to apply to withdraw the order.

Conclusion

Debt recovery in Mainland China can be challenging for international companies but recovery prospects can be improved with a well-considered recovery strategy is developed using appropriate legal and commercial tools. Clyde & Co Westlink JLV has significant debt recovery experience in collecting unpaid debts and account receivables for a wide range of local and multinational corporations across the world.

If you would like to understand more about our debt recovery practice in Mainland China, please contact Victor Yang or Francesca Hu.