Debt Collection in China: A little perseverance goes a long way

Most people believe China has a ‘great wall’ all around its boundaries. The same belief holds when it comes to debt collection, especially if one of the parties is out of China. At Horizons, we’ve met several cases where the creditors have simply given up when it comes to debt collection. Our position in this matter, before you write off your losses, is to know that the Chinese legal system is actually on your side.

Often, lack of awareness of the Chinese legal system discourages China-based foreign-invested companies from legally pursuing claims against debtors. Yet, more than that, all too many companies suffer from an ingrained, pessimistic attitude toward the Chinese legal system while knowing little about it. This needs to change.

The Chinese legal system does provision creditor companies to file lawsuits against debtor companies and litigate within the Chinese courts. However, claimants should be attentive to the prerequisites for such provision. Among them include a carefully drafted contract establishing governance of a Chinese exclusive jurisdiction, signed or performed in a locality within China, and direct materials to evidence factual business occurred, such as correspondence, invoices and other pertinent documents.

Under the Civil Procedure Law in the People’s Republic of China, a company based in China may bring litigation against companies outside of China; or inside of China if the litigating company is based outside of China. To illustrate this scenario, we offer a short analysis wherein a creditor company located in China may pursue debts collectable from a company outside of China — that is to say, a foreign company.

Filing a claim

In China, the Jurisdiction of the Court recognises a duly-signed agreement or contract between the two parties as evidence of an established contractual relationship. If there is no agreement or contract, the Plaintiff (the aggrieved company) may bring the claim to the People’s Tribunal in the place (province, city, district) of which (1) the contract was signed, (2) the fulfilment of the contract was executed, (3) the offence was committed, or (4) the property was seized.

Overseas delivery of claim and summon

In the latter instance, all required documents for the filing of a claim shall be submitted and approved by the competent court. On the assumption the case will be accepted by the Chinese court, the evidence and petition for appeal will be sent to the governing jurisdiction of the Defendant — in our example, the foreign company — under The Hague Convention of 15 November 1965 on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters. Although, such provisions are granted if the company’s country is a Contracting State. In other words, has committed to The Hague Convention on Communication of Judicial and Extrajudicial Documents.

Under the Convention, each Contracting State is to receive and serve from other Contracting State the Plaintiff’s claim and summon the Defendant to a hearing within the court, overseeing the originating claim. The documents are required to be written or translated into the language of the addressed state or the agreed language between the two states. If the documents are translated, the translation shall be certified by the consular agent or undertaken by a sworn translator. Documents may be served either by a method prescribed by the country’s internal law for service of documents or by the particular method request by the Plaintiff if the method falls under the law of the Contracting State. A certificate confirming delivery of the documents, method, place, date and person delivered to is required either from the addressee or state authority.

Enforcing judgement

Upon the assumption the verdict of guilty (judgement) is obtained, the debt execution within China is carried out by an execution officer provisioned in the Civil Procedures of the PRC. If there is no office or representative office of the foreign company (the Defendant) within China, the Chinese company (Plaintiff) may apply for recognition and enforcement judgment within the jurisdiction of the foreign company, provided a sworn or certified translation of the award is submitted.

Most countries under domestic law have the option to accept jurisdiction or based upon the principle of reciprocity to hear cases for recognition and enforcement of a foreign judgement. Chinese courts may themselves recognize and enforce foreign court judgments on the basis of international convention, bilateral treaties or — as referenced — the principle of reciprocity, provided they do not violate basic principles of Chinese law, state sovereignty and security, or public interest (note: China has not ratified the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters).

In a best-case scenario, the latter should provide procedures for recognition and enforcement between China and the country of the foreign company. Still, there is no official interpretation, either legislative or judicial, on what constitutes reciprocity and the basis of the application. It has been commonly understood that reciprocity is interpreted as the willingness by a foreign court to enforce a judgment issued by a Chinese court.

In sum, keep the faith and persevere

Collecting debt within China against a company outside of China is possible, provided the locality is China exclusive. A contract or agreement should specify the Chinese jurisdiction as the governing law or the performance of a contract, offence, and seizure of property is required to be committed within China, in order to file a claim to the Chinese court. Although such claims involving companies outside of China may be subject to domestic enforcement laws within the Defendants’ country, it should not immediately discourage companies from such proceedings, rather understanding and consulting experts for advice in obtaining debt are the best steps.

If you would like more information debt collection in China or other related issues, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.  

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