Debt Collections In China

1.1 Amicable Phase

1.1.1 General

Debt collection in China has a long and colorful history, leading to its eventual prohibition by the Chinese government late in the 19th century. That law remains in effect today; while companies do still strive to collect debts, they operate as law firms that exist outside the law banning debt collection companies.

That said, Collection Agency Service China does still provide amicable collections services in mainland China. Our offices are located in Hong Kong, which has long been exempt to the debt collection ban. Our company uses trusted partners in Hong Kong to pursue local collections services in China.

1.1.2 Local agent

Collection Agency Service China collects debts in Hong Kong; our services can also be used for debts on the mainland through our many partnerships there.

1.1.3 Interests

Chinese debts are typically not subject to interest rates, and debtors in China are not used to paying interest on their outstanding debts placed for collection. If and when a debt enters litigation, though, Collection Agency Service China will calculate interest on the loan using the current interest rate set by the People’s Bank of China, plus 30 to 50 percent.

1.1.4 Debt collection costs

Collection Agency Service China can charge debt collection costs to the debtor, but debtors are not used to paying them. They’ll typically negotiate for a removal of these costs in exchange for a settlement of the debt.

1.1.5 Prescription

Laws in China typically bear out a statute of limitations on debts of two years. This limitation is part of the civil rights code, and applies to:

– Claims for bodily injury
– Sales of substandard goods or services
– Property damage
– Refusal or delays in paying rent

The statute of limitations applied to carriage goods delivered by sea is reduced to just one year. By train, that is further reduced to 180 days.

The statute of limitations can be interrupted by any of the following:

– One party serves a document of claim on the opposing party
– One party makes a claim by correspondence or by data message, and that claim reaches the opposing party
– A financial institution deducts the debt and interest out of the opposing party’s bank account
– The opposing party cannot be located, and an announcement of claim is made in a national medium near where the opposing party was formerly located

These limitations are the most common examples, though other specialized cases have been known to interrupt the statute of limitations as well.

1.1.6 Accepted and most common payment methods

Chinese debts are typically satisfied by cheques or bank transfers.

1.1.7 Types of companies

Limited liability company (LLC):

Companies bear debts with property and assets. Minimum capital is 30,000 RMB, paid in currency or with intellectual property, land-use or other properties. Capital contributes paid by shareholders cannot be less than 30 percent of registered capital. Shareholders are responsible for company’s financial situation.

Joint stock limited company:

Companies bear debts with property. Minimum capital is 5,000,000 RMB. Shareholders are responsible for company debts based on their proportion of company shares. Company can be established by stock flotation or promotion.

1.1.8 Sources of information

Chinese lawyers can access debtor financial information via the Industrial and Commercial Authorities. That includes balance sheets and yearly income statements. Other information, like shareholder contact information and bank account information, can also be accessed. A private investigator is usually not necessary due to this information’s availability.

1.2 Retention of Title

The seller typically maintains ownership of any goods or services until they have been paid in full only when both the buyer and seller have agreed to this via contract. Without such an agreement, the buyer owns everything once it has been delivered.

Contract Law:

Article 133 states that ownership of a targeted good or service is transferred upon delivery, unless a signed document states otherwise.

Article 134 states that parties may stipulate retention of seller ownership in a purchase and sale contract.

1.3 Safeguarding measures

When debtors can not fully satisfy a debt, Collection Agency Service China will ask for a repayment plan via installments. This agreement is valid and enforceable and does not need to be notarized, though going through a notary does service to reinforce the legitimacy of the agreement.

When this type of agreement is created, a written contract is required. This is also true of mortgage agreements established on buildings, fixed land, construction activities, and contracted management of barren land.

1.4 Legal Procedures

1.4.1 General

Legal action between people and companies is regulated by private law in China. There is no need to give any warning before beginning a lawsuit. In some cases, a pre-court procedure may be initiated. This process can often be skipped.

1.4.2 Legal System

China has four court divisions within its legal system:

– Supreme People’s Court
– High People’s Courts
– Intermediate People’s Courts
– Basic People’s Courts

The Basic People’s Courts are the courts of first instance and have first jurisdiction over civil cases. The Intermediate People’s Courts have civil jurisdiction over cases with a more significant impact. High People’s Courts serve as the court of first instance for civil cases with the most far-reaching impact. The Supreme People’s Court interprets laws and legal questions regarding judicial proceedings.

1.4.3 Required documents

Lawsuits in China are subject to the following requirements:

– Plaintiff must be a Chinese citizen, legal person, or organization, with an interest in the case
– There must be a defendant
– There must be specific claims, clauses, and facts, leading to the lawsuit
– Parties to the case must provide their name, gender, age, ethnic status, occupation, work information, and home address to the court
– Evidence must be provided, as well as source information about each piece of evidence

Upon initiation of a lawsuit, copies of the lawsuit statement and all evidence need to be provided based on the number of defendants that are party to the suit.

1.4.4 Legal dunning procedure

A creditor who requests payment of a pecuniary debt, or the recovery of installment payments fro ma debtor, may apply to the Basic People’s Court when the following conditions exist:

– No other debts or disputes exist between debtor and creditor
– Order of Payment can be served to the debtor

Within 15 days of receipt of the Order of Payment, the debtor must clear their debts or submit a written dissent to the People’s Court in writing. If neither condition is met, the creditor can apply to the court of execution of the debt within the same 15-day period. Once submitted, the Order of Payment is terminated and the creditor can bring an action against the debtor.

1.4.5 Lawsuit

Lawsuits can only be filed by the creditor and are typically brought under the People’s Court nearest the debtor’s physical address. The case falls under the jurisdiction of the court nearest the defendant’s domicile. A lawsuit based on a contract dispute will be under the jurisdiction of a People’s Court local to the defendant, or nearest to the location where the contract is effective. It’s worth noting, however, that not all laws concerning jurisdiction are stated or clarified by the Chinese government.

1.4.6 Appeal

Either party can file an appeal if they disagree wit the result handed down by the loal People’s Court of first instance. This appeal must be filed within 15 days, and it must be in writing. The appeal’s content needs to include the name of the parties, the names of all legal representatives, the name of the People’s Court where the case was tried, the case’s file number, the cause of action, and the reasons for appeal.

1.4.7 Costs

Legal costs are typically assigned to the losing party in a lawsuit.

1.4.8 Expected timeframe

Cases tried via summary procedure must be completed within three months of the date it is entered onto a trial docket. When the case is handled via normal procedure, it must be completed within six months. If an extension is necessary, a six-month extension can be permitted if the president of the court approves such a motion. Any further extensions must be reported to a higher level of the People’s Court system. The appeal of a case must be completed within three months after docketing by the People’s Court.

1.4.9 Interests and costs in the legal phase

Interest and legal costs incurred during the suit can be claimed as part of the balance of the debt.

1.5 Enforcement

1.5.1 Enforcement in debt

All parties to a lawsuit must comply with the judgment or written orders in civil cases. If either party refuses to comply, the opposing party can apply for execution of the judgment. Any fees arising thereof will be paid for by the debtor. The applicant does not need to repay.

1.5.2 Enforcement in movable goods

If a debtor subjected to the process of execution of the debt does not fulfill their obligations according to the execution notice, the People’s Court has the right to make inquiries with the debtor’s banks, credit accounts, and other companies that deal with the debtor’s financial matters. The People’s Court can then freeze those accounts or claim deposits toward the payment of the balance.

The People’s Court is also able to freeze and sell the debtor’s assets or property via auction in order to ensure the satisfaction of outstanding debts via execution.

1.5.3 Enforcement in immovable goods

The same policies apply as in 1.5.2.

1.5.4 Expected timeframe

Enforcements typically take less than six months, but can be extended if necessary.

1.6 Insolvency Proceedings

1.6.1 General

Individual enforcements are suspended upon the start of preliminary proceedings. If insolvency proceedings cannot be initiated, individual enforcements will continue. Insolvency works to pay all creditors by liquidating a debtor’s assets.

1.6.2 Proceedings

Upon being unable to pay off debts, a debtor’s creditors may file for reorganization or liquidation via bankruptcy with the People’s Court. When such a motion is made by a creditor, debtors will be notified within five days of receipt of the application. The court allows seven days for the debtor to file a written objection. The court will also decide whether or not to accept the application for bankruptcy within ten days of the notice.

The court will conduct its examination and inform creditors of the outcome within 25 days after making its ruling if it accepts the bankruptcy application. It will then make a public announcement. After the application is accepted, debtors cannot pay off any debts to a specific creditor.

Any civil actions taken against a debtor will be suspended during the bankruptcy process, after the People’s Court has accepted the bankruptcy application. After acceptance of the application, legal action can only be pursued by the creditor if it is in the same People’s Court as the bankruptcy proceedings.

1.6.3 Required documentation

Bankruptcy applicants need to submit the following information with their application to the People’s Court:

– A statement of the conditions between the debtor and creditor
– Purpose of the application
– Grounds for the application
– Other matters of interest to the People’s Court

The debtor will need to submit a description of its financial situation, including a detailed list of debts and credits. Relevant financial reports, settlement proposals, and evidence of the payment of salaries and social security expenses of a company’s employees must also be submitted.

1.6.4 Expected timeframe and outcome

After an application is accepted, the administrator of the case can discharge debts or continue any existing contracts made prior to the filing. If the administrator does not give notice to the parties named in the proceeding within two months of the application’s acceptance, or reply to the involved parties within 30 days of their notification request, then any existing contracts will be invalidated and discharged.

The People’s Court will confirm any time limits of the creditors and will declare their credits after accepting the bankruptcy application. Those time limits will be between 30 days and three months of the public announcement of application.

The debtor will submit a draft reorganization plan within six months of a ruling permitting such reorganization. This will be submitted to both the court and the creditors. The court can grant an extension of three months if needed.

Insolvency proceedings, in total, take between two and four years. Specialized cases take longer.

1.6.5 Limited companies

Within ten days of the proceedings’ conclusion, the administrator will handle revocation of registration for the bankrupt company at the People’s Court registration authority.

Directors, supervisors, and other officers of the bankrupt company will bear the civil liabilities of the outcome. The person involved in the proceedings cannot function as the director, supervisor, or officer of any other company within three years of a concluded bankruptcy procedure.

1.6.6 Non-Limited companies/individuals

Individuals and non-limited companies cannot declare insolvency. They must pay the expense of debts until paid off or released by the creditor.

1.6.7 Pool of creditors

Chinese law includes no such term.

1.6.8 Rescission

When debtors or creditors disagree to a term contained in the Credit Form, lawsuits can be filed with the People’s Court overseeing bankruptcy proceedings. Salaries, medical benefits, disability benefits, and pension expenses due to employees should be paid to those employees as determined in Chinese laws and regulations, and these do not have to be declared as part of the Credit Form. These amounts shall be listed to the public by the case’s administrator after any corrections have been made. If no corrections need to be made, a company’s employees can immediately initiate legal action with the People’s Court.

1.7 Arbitration and Mediation

Foreign contracts with entities or investments in China typically require friendly negotiation between the parties. This is followed by arbitration if the negotiation process fails to produce an agreeable outcome. Foreign arbitration in China is administered by the China International economic and Trade Arbitration Commission. According to Chinese law, the arbitration agreement must be in writing and contain the following:

– Indication of the intent to apply
– Arbitral proceedings
– The selected commission of arbitration

Medication is typically not used to resolve disputes.