Trends in PRC Enforcement: A Rise in Defaults Signals a Future Influx in Claims Involving Chinese Entities

With the world’s second-largest economy, and with annual GDP growth of more than 9 percent, on average, the People’s Republic of China (PRC) is central to the global business landscape. The nation plays a key role in many already-stressed global supply chains, which means economic trends in China inevitably cause significant impacts elsewhere in the world.

Chinese companies are not immune to soaring inflation and the rising cost of debt. In fact, issues in the property sector in China have led to mortgage boycotts and new programs to bail out the mortgage and real-estate industries. In fact, Chinese firms had missed payments on $37.3 billion of offshore bonds through mid-2022, with property developers responsible for nearly all of that total.

Given the sharp increase in Chinese defaults and other warning signs of looming business insolvencies, it’s likely that an increase in claims being brought involving Chinese entities will be a significant legal trend in years to come, impacting companies that have done business with and in China.

Given these circumstances, it’s important to understand the particular enforcement challenges and trends relating to claims brought against Chinese entities.

Chinese Judgments Are Increasingly Being Recognized Overseas

U.S. courts are increasingly showing their willingness to enforce Chinese judgments. In March 2022, New York’s Appellate Division reversed the trial court’s decision in Shanghai Yongrun Investment Management Co. v. Kashi Galaxy Venture Capital Co., the implications of which are explained below. This reflects a growing trend: Just two months earlier, a U.S. district court in Illinois recognized and enforced a Chinese judgment in another business dispute, in Yancheng Shanda Yuanfeng Equity Investment Partnership v. Wan.

These decisions shifted what had been a challenging stance toward enforcement of Chinese judgments by U.S. courts. In April 2021, the New York trial court in Shanghai Yongrun had refused to recognize and enforce Chinese court judgments on the grounds that China did not provide impartial tribunals or procedures that are compatible with the due process of law. The court relied on State Department Annual Country Reports as conclusive evidence that Chinese courts lacked judicial independence. The court held that the judgment was unenforceable because of a lack of due process, despite the defendant being represented by counsel, having the opportunity to present its case, and appealing unsuccessfully.

The potential ramifications of the Shanghai Yongrun decision would have been far-reaching. Indeed one law professor went so far as to argue that no Chinese judgment would have been entitled to recognition in New York or any other U.S. states that operate under the Uniform Acts governing foreign judgments—and, further, that concerns about the judicial independence or corruption in 141 other countries, including Argentina, Brazil, Italy, Japan, Mexico, South Korea, and Spain, could have made judgments from many other countries unenforceable in the United States. As another unintended consequence, U.S. judgments would have effectively become unenforceable in China because China enforces foreign judgments based on a principle of reciprocity.

Thus, the appellate court’s reversal of the Shanghai Yongrun decision confirms the enforceability of a Chinese judgment in the United States and improves the chances of a U.S. judgment being enforced in China reciprocally.

In addition to U.S. courts showing their willingness to enforce Chinese judgments, increasing recognition of Chinese judgments is evident in other jurisdictions: In 2020, a British Virgin Islands (BVI) court recognized and enforced a judgment delivered by a PRC court for the first time, in Industrial Bank Financial Leasing Co Ltd and Xing Libing. This broader trend clarifies the enforceability of judgment and awards for companies looking to enforce a Chinese judgment overseas.

Enforcing Foreign Judgments in the PRC Remains Difficult

While it is becoming gradually easier to enforce Chinese judgments overseas, outbound enforcement of foreign judgments in China is the next great challenge.

Generally, foreign arbitral awards can be enforced in China in most instances under the New York Convention, to which China has been a contracting state since 1987, but foreign court judgments are much harder to enforce domestically in China.

China has entered into 34 bilateral treaties with other countries for recognition and enforcement of foreign judgments. But for those countries without a bilateral treaty (including the United States and the UK), parties must rely on the principle of reciprocity, which is determined by local courts on a case-by-case basis. The ad hoc nature of these decisions makes outcomes hard to predict.

Moreover, the recognition of a judgment in China is only the first hurdle hindering enforcement: Even if a judgment is recognized, significant expertise is needed to hunt down assets in the region. Debt recovery in China is notoriously challenging for international companies, but recovery prospects can be improved with a considered asset recovery strategy and expert help.

Recovering Chinese Judgment Debts Is Easier Outside of the PRC

Although significant hurdles remain to recovering and collecting judgment debts from Chinese debtors, it may be easier for companies with judgments against Chinese entities to recover damages from property held in more debtor-friendly jurisdictions overseas. Many Chinese entities, particularly large-net-worth entities, have geographically dispersed assets, in part to avoid scrutiny by the Chinese government into assets held locally.

Judgment debtors with this profile often own international assets such as yachts, jets, properties, and offshore accounts within complicated corporate structures, including holding companies registered in offshore jurisdictions such as the Cayman Islands or the BVI.

Judgment debtors with an international profile present more opportunity to restrain and recover assets. Creditors should look to overseas assets as potential collateral for their judgment debts. Often, professional asset recovery and business intelligence expertise is needed for successful collection to understand how debtors think, how they hide assets, and how to bring them to the table.

Keys to Recovering Money

The recognition of an award or judgment merely gives the decision legal force in a given jurisdiction. Recognition is just one piece of the puzzle: It doesn’t necessarily mean that a company can or will execute on that decision and recover the money that’s due.

Recovering judgment debts requires an aggressive recovery strategy and strong financial backing to hunt down and secure assets. Collecting on large international judgments and awards is not easy, which is among the reasons why many companies have large unenforced awards outstanding.

For proceedings in China, where there is a high financial barrier to entry for asserting a creditor’s claim, it is particularly important to engage experienced asset-recovery specialists. To cite one example, the judgment creditor is required to post bond of around 30 percent of the amount to be restrained, in order to secure some interim relief over assets (Article 5 of Provisions of the Supreme People’s Court on Several Issues concerning Cases of Property Preservation Handled by People’s Courts (Amended in 2020)). In large and complex cases, this can be a huge figure that skews litigation budgets and acts as a disincentive for recovery.

This piece also appears in the latest edition of The Burford Quarterly and can be found here: www.burfordcapital.com/burford-quarterly/2023-issue-1/prc-asset-tracing-enforcement-trends-2023/.

Michael Redman is a managing director responsible for overseeing Burford Capital’s operations in London and co-leading Burford’s global asset recovery and enforcement business. He has worked in complex asset recovery and enforcement for well over a decade, holding senior positions in both Moscow and London before co-founding Focus Intelligence Ltd., a leading asset recovery advisory boutique acquired by Burford in 2015.

From: New York Law Journal