China Lawsuits: How to freeze assets of a Chinese Company

If you have unresolved issues with your business partner in China and are planning to file a lawsuit, you should seriously think about using the court system to freeze the assets of the target company (before they have a chance to disappear)!

Dispute Resolution: What are the options?

Jump right to litigation?

Unless you are sure you have an "open & shut case" and all negotiations with the target company have been exhausted, in the interest of time and budget, it is probably not in your best interest to take the target company to court as your next move.

For the vast majority of cases, the appropriate next step is to engage the Demand Letter Services (of a Chinese lawyer) or have a trusted, local lawyer negotiate a settlement.

But if demand letters and negotiations have been exhausted or unlikely to work, then don’t be afraid to go to court.

Here is a flow chart to walk you through the options for “court vs demand letter vs give up”.

Background on Chinese Court Cases

Too many foreign business owners are hesitant to initiate legal action in China because they make the false assumption that the legal process in China is time consuming, expensive and the justice is unfavorable to foreign citizens. However, in reality:

  • Court cases move much faster in China than in the US or Europe.
  • Court fees and legal fees in China are also a fraction of what you may expect back home.
  • On occasion we do encounter local favoritism in the lower courts.

 

But most of the time, foreigners can get a fair shake in China if they follow the local rules and are represented by a professional lawyer that is registered in China.  The few times that we encountered local favoritism in a local court, a more acceptable outcome was achieved during the appeal process at a higher court.

Do I have to go to Arbitration?

If your contract has an arbitration clause, those avenues will most likely need to be explored before going to court in China.

If you have opted for arbitration in China, most likely you and your Chinese lawyer will be dealing with the China International Economic and Trade Arbitration Commission (CIETAC). The processes and time needed for most cases flowing thru CEITAC are listed as followed:

CIETAC

a. Preparing Key Documents

The power of attorney document is signed with the lawyer who will submit the case on client’s behalf.

The client couriers to China the original documents of its board resolution to submit this case for arbitration.

Client may also be asked by the arbitration court to prepare notarized copies (which need to be authenticated by your nearest Chinese consulate) of the following documents:

Proof of business registration
Proof that you own the business

Express mail to China only needs a few days, so the timeframe needed for the above steps is highly dependent upon the client’s ability to coordinate its board of directors and the local consulate.

 

b. CIETAC reviews the case (1-7 days);

If arbitration has been exhausted or you didn’t have an arbitration clause in your contract, then you may consider court action.

How much does a court battle cost in China?

Most lawyers charge by the hour.  While cases move thru the courts in China quite quickly in most situations, there are just too many variables to give an accurate estimate of the exact hours needed by the lawyer to complete legal action.

At AsiaBridge, clients are invoiced in the form of a block of time which is offered in 4, 10, 20, 40- and 80-hour blocks.  In this fashion the clients only pay for one block at a time and have direct control over the amount they spend on a court case. The larger the block, the lower the per-hour fee.

Can you freeze the assets of the target company?

You may be surprised to learn that even as a foreigner, you have the ability to freeze the assets of a Chinese company when you open a court case.  This is an important tool to be aware of because it doesn’t do much good to win a court case but fail to collect financial compensation because the Chinese entity has liquidated their assets during the trial!

How much does it cost to freeze the assets of a target company?

There are two primary cost silos when freezing assets of a Chinese company during a court battle.

  1. Court fees when applying to freeze assets
  2. Collateral

The maximum fee for the court’s administrative charge when freezing assets of the Chinese company is RMB 5,000.00.

However, the plaintiff will need to provide collateral to the court when submitting the application to freeze assets of the target company. Plaintiffs often use an insurance company to issue a letter of guarantee to the court. The rate charged by the insurance company is around 0.05%-0.5% of the amount to be frozen.

In most cases, the collateral will be returned to the plaintiff.  But if the defendant wins the case and demands the plaintiff to compensate for damages that resulted from having their assets frozen, then the collateral will not be returned to the plaintiff until the compensation is settled. This is the mechanism Chinese courts use to prevent frivolous lawsuits and unjust freezing of assets.

What documents and timeframe are needed to freeze the assets of the target company?

Step One:  Preparing Documents

    1. The power of attorney document is signed with the lawyer who will submit the case on client’s behalf.
    2. The client couriers to China the original documents of its board resolution to submit this case for arbitration.
    3. Client may also be asked by the court to prepare notarized copies (which need to be authenticated by your nearest Chinese consulate) of the following documents:
       -  Proof of business registration
      Proof that you own the business

Express mail to China only needs a few days, so the timeframe needed for the above steps is highly dependent upon the client’s ability to coordinate its board of directors and the local consulate.

Step Two: Apply to freeze the assets

The lawyer submits the application regarding freezing the Chinese company’s assets to the local court.   This step can take 1 to 5 business days.

Step Three:   Approval to freeze the assets granted.

The local judge will review the application and a make the decision about freezing the assets.  This step can take up to two weeks. But in some cases, the lawyer may hear back from the court within just a few hours.

Please note that the court has the option to have all English documents translated into Chinese by a court approved translator.  But in some cases, the Chinese courts may accept the originals in English.  The situation varies from city to city and court to court.

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About the Author: Michael J. Bellamy

About the Author: Michael J. Bellamy

Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses.  Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.

A featured presenter on China issues at seminars, trade shows and corporate events across the globe.

Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/

Mike is the author of “The Essential Reference Guide to China Sourcing
(available on Amazon).

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