Practical Guide To International Debt Collection in China

Practical Guide

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China

Is there a minimum amount to start a legal action?

In China, there is no minimum amount required to start a judicial process. Even so, we consider that a claim below CNY 50,000 (€6,500) is uneconomical due to the costs (especially the attorney fee) involved.

Will the amount due condition the type of procedure?

The amount involved will have an impact on the level of Court that will hear at the first instance. To be specific, there are four levels of the court system[1] in China:

  • The Supreme People's Court (S.P.C.)
  • Higher People's Court
  • Intermediate People's Court
  • Primary People's Court(Basic Level)

First-instance civil and commercial cases are heard in courts of different levels and are mainly determined by the type of case and the amount in controversy. The standards in different regions are also different.

Moreover, for uncomplicated cases (usually with a small amount in dispute), heard by a primary people's Court, the simplified procedure could be applied. Compared to the normal approach with an ordinary procedure, and the collegial-panel system, the simplified procedure cases will be mostly heard by a single judge. As to whether to apply the simplified procedure or not, it is not a matter of the parties' choice, but an issue decided by the Court.

[1] In addition, there are also several specialized courts in China, which mainly include intellectual property courts, Internet courts, financial courts, and maritime courts. These specialized courts are not included in our discussion as they are less related to the dispute of international debt collection.

Is it mandatory to send a warning letter before taking legal action to collect a debt?

Although sending a warning letter is not mandatory before starting legal action, it is common and advisable to do so as a preliminary step. In doing so, it is advisable to take these several relevant tips into account:

1) It is advisable that the letter should be prepared and sent by a Chinese lawyer because there are certain content and form requirements according to which the debtor will be obliged to pay the costs of the process that follows.

2) The letter should be as simple as possible, brief, and without unnecessary warnings. According to our experience, the most effective letters are those sent by a lawyer who simply communicates the decision of the creditor to start a court procedure if the debt is not paid within a certain period.

3) We also recommend an accurate calculation of the interests on the debt. This is an amount that can be relevant and can be an encouraging element to push the debtor to pay or to reach an agreement.

4) It is finally advisable to send the letter once the creditor has all the documents to start the judicial process so that it will be possible to immediately file the claim in case the debtor does not pay within the given period.It's also worth noting that, under P.R.C law, the regular time bar for a creditor to file the claim against the debtor is 3 years after the debt becomes overdue. However, the time bar may be interrupted and commence again by means of such warning letters.

What are the best practices for creditors to increase the possibility of recovering the debt?

In general, any evidence that documents business relationships can be useful: correspondences, messages, witnesses, third-party documents, and any other possible evidence that can prove the relationship between the parties.

We recommend properly documenting the relationship with the assistance of an attorney at each step, taking as many of the following documents and precautions as possible:

1) Signed contracts, containing the obligations of the parties.

2) Organized orders for goods or services with detailed written documents.

3) Ensure, if possible, the solvency of the debtor or agree on guarantees such as first demand bank guarantees.

4) Agree in writing to any further modifications of the obligations.

5) Leave written evidence of any objection of the debtor for the goods delivered or services provided.

6) Always try to identify and keep documents that can be used to locate assets of the debtor subject to future seizure if necessary (such as bank accounts, movable properties, offices open to the public, etc.)

How can a foreign creditor start a procedure for international debt collection in China?

In general terms, we would say that, for a foreign creditor to start a judicial process in China, a lawyer is not mandatory but indeed necessary, as he/she can provide assistance and convenience for the creditor in the process.

When parties are represented by a lawyer, it will be necessary to grant special power of attorney. Although it is, in theory, possible to release such a power before the Court, in the case of foreign creditors, it is highly recommended to do it before a Public Notary, and then it needs to be legalized by the Embassy (or Consulate-General) of the P.R.C. This power will follow the draft provided by the lawyer.

In China, for cases involving debt collection, the Court would charge a case filing fee (from 2,5 % to 0,5% depending on the amount of credit), which shall be calculated on a cumulative basis subject to the amount the claim. The case filing fees shall be prepaid by the plaintiff, and shall eventually be borne by the losing party, unless the winning party bears the fees on their own free will. Where the party partially wins or loses the action, the Court may, as the case may be, determine the amount of the fees to be respectively borne by the parties.

Unlike common law jurisdiction, judicial mediation in China is an integral and important part of the P.R.C litigation procedure. In practice, the Judge will often strongly urge the parties to mediate. If mediation fails, the parties are entitled to argue the case before the same Judge.

Which documents are necessary for debt collection in China?

The main element to verify before making any decision about whether or not to recover the debt before a court should be how to prove the debt. In Ordinary proceedings, debts can be proven by any means admitted by law, including witnesses, legal or judicial presumptions, or, even, the debtor's conclusive acts. Some of this evidence would be provided with the claim (for example, documents), while others could be proposed and carried out in a second step of the process (for example, witnesses).

This said, and even given the different possibilities for types of evidence, Courts usually prefer some types of evidence over others. For example, a conclusive document will always be considered better evidence than a witness. Therefore, the better a debt can be evidenced with documents, the better the possibilities of success in Court, or of reaching a good agreement.

What happens after the first demand for payment?

If the Court procedure has not still been initiated, and there is only a warning letter, the debtor's actions will have consequences depending on the response they may provide, if any (for instance, if they refuse or contest the relationship or the amount, or if they include some other counterclaims, or if they simply do not answer).

If a recovery Court process has been initiated, the debtor's acceptance and payment may imply their obligation to also pay the procedural costs if this has been previously required by any recorded means. If the debtor opposes, then the trial will continue in its different phases.

When can interim measures be taken?

In general terms, the best opportunity for the creditor to start any legal claim is to find out, with the help of a lawyer, as much as possible on the solvency of the debtor.

In addition, there are several preservation measures that can be taken to ensure the effectiveness of a judgment. The preservation will often be initiated by parties by submitting applications to the competent courts. This applies to both pre-action and post-action proceedings, which means a party may submit an application before or after a claim is officially brought to Court. Depending on the nature or features of the property concerned, the Preservation often takes the form of sealing up, detaining, or freezing, by which any future transfer, removal, or alteration of such assets without the Court’s prior approval will be restrained.

A guarantee is a prerequisite for a pre-action preservation. After an application for a pre-action preservation is filed and a guarantee is provided by the applicant, the Court may give an order for a pre-action preservation. The applicant’s claim should then be brought against the respondents by filing a claim form (to courts or arbitral tribunals) within 30 days after the order of pre-action preservation is enforced, so that the merit of the case can be heard. Failing to do so will result in the order being lifted. An automatic transition from pre-action P.P. to post-action P.P. will take place once the case is officially lodged.

If, however, an application is submitted only after the commencement of the proceedings, it is at the Court’s discretion to determine whether a guarantee is required or not. In practice, courts usually do require a guarantee to be provided.

Guarantees are often made in the form of cash, real estate, movable assets, assurances, or guarantees from guarantee companies.

If, for any reason, recovery was not possible, is there any other action that the creditor could take to write off such debt in its accountancy?

In the event of insolvency of the debtor or impossibility of collection, the safest and most effective way to obtain a document that allows the credit to be taken as a loss and receive the tax benefits this entails is to try to claim the debt through a lawyer.

In some cases, it is possible to obtain a judicial document proving the insolvency, or a court notice attesting the difficulty or impossibility of such collection.

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