Debt collection in China can be messy and costly. However, at some point almost every business owner operating in China or foreign businesses dealing with China will need to deal with unpaid accounts. Fortunately, our China lawyers know all the steps which can be taken in accordance with Chinese laws, policies, and regulations that may help such collection run smoothly. Debt collection may be pursued through a process of direct negations with the target company or by filing a litigation or arbitration. We highly recommend preventive action that can be taken to help prevent the need to collect debt in the future.
In many cases brought to our China lawyers, the client seeks to collect on amounts less than USD $100,000 owed by a China company. This is not as straightforward as you may imagine. A lot will depend on the supporting documentation. This includes any formal contract, and any email communications, purchase orders, or bank transfer documents that evidence the transactions at issue.
Often supporting documentation available is not sufficient to support a debt collection action in China. We find business owners often take what they see as a practical approach, rather than a legal approach to China transactions. In many cases there is no underlying written contract, and the “deal” between the foreign company and the Chinese company is represented across a series of emails. Often, where there is a contract, it is only in English, applies foreign law, attributes jurisdiction over the matter to foreign courts, or is not properly executed by the Chinese company. Any one of these issues will make your agreement useless as far as eventually enforcing against a Chinese company.
The worst and most common mistake is using the Chinese company’s “English name” to identify it in the agreement. In China an English name has no legal significance and is not registered anywhere. When a Chinese company uses an English name, this purely for purposes of marketing themselves to potential foreign customers. The company’s true official name is registered in Chinese characters. Often due to translation issues, it will be impossible even to identify the correct Chinese company which matches the English name provided. In fact there is nothing stopping a Chinese company from using an English name that has absolutely no connection with their real Chinese name. Our China lawyers see this all the time.
There are no debt collection agencies in China, at least no legal ones. There are likewise no credit reporting agencies. Police will not become involved in such payment disputes (unless the value is in the millions of USD), seeing them as primarily commercial disputes and not a criminal issue. Often where clients seek to report such commercial “theft” to the police, we advise the client this is a waste of time and money.
Litigation or arbitration is costly, expenses can quickly exceed the value of many commercial debts. Chinese companies know all of this, and use it to their advantage. Length of time to file a suit will depend on the process of gathering evidence. Any documentary evidence originating overseas is required to be notarized and authenticated. We would normally allow 1 to 3 months for litigation preparation and filing. The statute of limitations for commercial disputes is two years.
The first step of a Chinese debt collection is to perform due diligence as to the supporting documentation and the Chinese company. This consists of a review of the underlying documentation picking out company identifying information, and performing a search for the real company which matches the available information. If the correct Chinese company cannot be identified from the supporting documentation, it is in most cases not worth pursuing the debt collection further. This due diligence process must be performed by a China lawyer who knows what they are looking for.
If the decision is made to proceed with the debt collection, we prepare a demand letter, and initiate direct discussions with target company. For all the reasons above, Chinese companies are resistant to payment on such debts, even after receiving a demand letter.
We recommend clients focus on prevention to avoid situations which would lead to the requirement to collect debts in China. The first step of prevention is having an effective China enforceable contract that clearly describes payment processes and procedures, and minimizes prepayments which would put the foreign company at a disadvantage. We recommend up front due diligence in each case to identify all important identifying information about the target Chinese company, so that information is available to ensure the agreement is prepared and executed properly so as to ensure effective enforcement against the China company should the need arise.