As discussed in our previous Blawg post (
here
) it is an all too common occurrence in China for a party seeking to enforce a favorable judgment to find their counterparty’s bank accounts emptied. In this case, filing for the bankruptcy of the company having the judgment against it may be the only opportunity to collect on the judicial award.
Bankruptcy may be beneficial as the bankruptcy procedures are much more thorough and invasive than typical judicial enforcement proceedings. The court in a bankruptcy proceeding puts much more effort into finding and identifying the debtor company’s property and assets, and carefully reviews the debtor company’s financial statements and accounting records.
After the People’s Court accepts the application for bankruptcy, the court will appoint an Administrator to take over operations of the company under the bankruptcy proceeding. The Administrator will assume control over the debtor’s property and assets. After an initial investigation the Administrator will make a determination regarding whether the investor of the debtor company has completed its obligation to fully pay-in the company’s registered capital. If it is determined that the registered capital has not been fully paid, the Administrator will require the investor to fully pay the registered capital amount regardless of any previously existing payment schedule.
Additionally, the Administrator has the authority to file an application with the bankruptcy court requesting that registered investors, shareholders, directors, senior management may assume liabilities in connection with the debtor company, and the court may include these individuals’ or entities’ assets as a part of the debtor’s property in the bankruptcy proceeding.
The Administrator is authorized to investigate and to recover any of the debtor’s property that has been illegally decreased through actions of the debtor such as through the hiding or transfer of assets and property to avoid payments of debts or court awards. Red flags the Administrator may look for are falsified debts to third parties; the conveyance of property free of charge or at unreasonably low prices, advance pay offs on debts which are not yet due, or actions taken to waive or disclaim credits or accounts receivable.
All such suspicious activities taken in the period of one year before the application for bankruptcy may be reviewed and reversed by the court. If such activities are found to have caused damage to the interests of the creditors, the administrator may bring an action against the Legal Representative of the debtor company, and other persons directly responsible for the debtor, on the grounds that such persons committed intentional misconduct or gross negligence with regard to the debtor’s property. Where such actions result in a loss to the debtor’s property, the Administrator may demand such persons compensate the debtor company appropriately.
Where any Director, Supervisor or Senior Management of the debtor company takes advantage of their authority to gain increased compensation or a financial bonus, the Administrator is authorized to recover these funds and is authorized to hold such individuals responsible.
As can be seen, the investigative process at bankruptcy is significantly more in-depth than the court’s normal enforcement proceeding following an arbitration or judicial award. At an enforcement proceeding, the company must only evade the courts inquiry into one or more bank accounts. By contrast, the bankruptcy proceeding entails a detailed review of current assets and recent transactions. Most importantly, the bankruptcy proceeding entails the threat of personal liability for shareholders and company management personnel which are found to have dealt dishonestly or unfairly with the company, or attempted to hide assets.