5 Practical Tips for Debt Recovery in China
International trading companies may face some debt disputes inevitably during cross border transaction and all these bad debts will definitely lower their strength in the long run. In the face of so many unrecoverable debts, these enterprises could do nothing but to bear the burdens alone. Thus the trading companies needs to manage their receivables actively prior to the occurrence of overseas bad debts so as to minimize the bad debts.https://www.law-office-in-china.com/debt-collection-in-china/
Here’re five ways for international debt recovery and receivables management:
I. Before the occurrence of overseas debt
As the saying goes, “make hay while the sun shines”. It also applies to receivables management and international debt collection. If taking some necessary preventive measures prior to the occurrence of overseas debts, the Creditors could stand in a favorable position while recovering debts. Creditors need to pay attention to the following aspects:
i) Review the qualification of the debtor
Common potential risks scenario:
a. Parent company with favorable credit standing and solid strength participate in business negotiation and branding, but entrusts a subsidiary with a low registered capital and performance competence as trading company to sign the contract. According to the Company Act of P.R.China, the shareholders undertake limited liabilities within the scope of subscribed registration capital, creditors may suffer a total heavy loss once the trading amount is huge.
b. A domestic company negotiate the business terms but entrusts an offshore company to signs contract, PO or PI, etc., legally the offshore company performs the contract and bears the legal liabilities, but it would be very difficult for legal remedy against the offshore companies. The debt collection in China would be quite difficult.
ii) Review debtor’s debt-paying capacity
iii) Review debtor’s business reputation
Before signing a contract, ask a lawyer in China if there is a large amount of litigation pending against the counterparty and its role in the litigation (plaintiff or defendant? Is there bad faith?, etc.) .
iv) Review if the terms of the contract or agreement to be signed are intact and if both parties’ rights and obligations have been defined
Drawing up a customized trade contract is very important to the protection of the creditor’s rights, and even directly determines whether the creditor’s rights can be successfully recovered. There are too many lessons to be learned from practice.
v) If security measures can be taken, the debtor should be required to provide security guarantee as far as possible, because the secured creditor’s rights are superior to other creditor’s rights, which is an effective way to reduce risks. Of course, attention should be paid to the legal validity of the guarantee when establishing the guarantee.
vi) Contract performance process management is very important for transaction security.
When a buyer buys flour, how do they make sure that the seller ships it on time and that it’s flour and not sand or something? This involves the inspection, loading and unloading of goods survey and other contract performance process control.
II. Monitor debtor’s business status after the occurrence of overseas debt
Once debt occurs, the debtor may face deteriorated production and business status, go out of business or even disappear. In this case, it is difficult to recover outstanding invoice smoothly. After the debt is incurred, the creditor shall make necessary understanding and monitoring of the debtor’s business condition, and shall take necessary measures in case of serious deterioration of the debtor’s business condition, or transfer of property, withdrawal of funds, or loss or possibility of loss of the ability to perform the debt.
III. Creditor rights protection under receivable overseas debts
There are many ways available for overseas debt collection, such as negotiation, mediation, arbitration and lawsuit. As long as they are used timely and properly, they will get twice the result with half the effort. However, some creditors often take too long to negotiate in order not to harm relations, many opportunities for successful debt collection are lost.
To apply payment order is one of the effective ways for debt recovery in China. According to the provisions of Civil Procedural Law of the People’s Republic of China, in case of requesting the debtor to pay money, securities, etc., the creditor can apply to the court with the right of jurisdiction for payment order if the following conditions can be met: The debtor and creditor have no other debt dispute; the payment order can reach the debtor.
Where the debtor fails to pay the debt or does not bring forth a written disagreement to the court within fifteen days after receiving the payment order, the creditor can petition to the court to enforce the debt promptly. It is considered as the most efficient and effective tool for debt recovery. If the debtor brings forth a written disagreement within the legal time limit, then the dispute shall be settled through court proceedings.
Court proceedings are the very way that is most efficient and protects creditor’s rights finally, for the creditor could petition to people’s court for compulsory execution as long as the debtor refuses to perform the court’s legal documents that have taken effect.
IV.Evidence collection, protection and burden of proof
According to the provisions of Civil Procedural Law of the People’s Republic of China, the principle that he who lodges a claim shall be responsible for testification must be observed for civil actions. If the party concerned cannot provide the corresponding proof for the claim, then he shall bear the legal consequences arising therefrom. In the debt disputes, the creditor needs to collect the following evidences: Evidences about the debtor’s qualification, contract or agreement, delivery note (signed by the debtor and stamped with its official seal (if the debtor is an entity)), shipping order, IOU, settlement receipts, etc. All the other telegraphs, faxes and correspondences related to the debts shall be kept properly.
V. Limitation of action ——A legal issue that must be highlighted
Limitation of action refers to the civil action legal system under which the obligee may lose the rights of protection according to the legal proceedings if not exercising such right within a certain period of time. The party concerned may lose the right of winning the lawsuit, if failing to claim rights within the time limit specified in laws.
The limitation of action specified in the Civil Procedural Law of the People’s Republic of China includes two types. One is general limitation of action, which means the limitation of action applicable to different kinds of civil legal relationships, unless otherwise specified in laws. Its term lasts for three years in China.
The other is special limitation of action, which means the limitation of action applicable to some special civil legal relationships. Its term lasts for one and four years in China.