Plaintiffs should apply for preservation of assets in order to avoid finding, after long and expensive litigation, that the defendant has hidden or transferred their assets. This is particularly important in China where local protectionism can mean that local governments help companies in which they have an economic interest hide assets or dodge debts.

Once the court issues an order to freeze a bank account or seal a factory, the defendant cannot transfer or encumber the assets, and local government and party officials are less likely to try to prevent enforcement of the judgment.

While China's civil procedure law allows for preservation of assets, plaintiffs regularly run into obstacles in practice. Sometimes judges deny the request because they fear that the plaintiff is simply trying to gain settlement leverage by tying up assets and interfering with the defendant's ability to operate the company. But in most cases, local protectionism is the cause as judges, under pressure from the local governments that fund the courts and make personnel decisions, find excuses to deny the plaintiff's application.

Applying for Asset Preservation

Plaintiffs generally should apply for preservation at the time of initiating suit. Plaintiffs are required to put up a bond in the amount of the assets against which preservation is sought. Usually, plaintiffs will obtain a third party guarantee from the parent company or another related company. The plaintiff will need to do their own investigation to identify the defendant's assets. This is often done in conjunction with professional investigation companies.

Bank Accounts

Plaintiffs prefer to freeze bank accounts because enforcement is easiest. Should the plaintiff prevail, the court will simply order the funds in the account be transferred to the plaintiff. While seemingly straightforward, freezing bank accounts is difficult in China.

Article 48 of the PRC Commercial Banking Law (中华人民共和国商业银行法) expressly limits companies to one basic bank account for settling normal business transactions. In practice however, companies regularly have several accounts in various names and there are no central records. Moreover, banks are usually not willing to divulge account information.

Parties can start with information provided by the defendant through the normal course of business but there is usually little money in such accounts. A more promising source is third parties with which the defendant is doing business. However they are under no obligation to provide any information.

Administrative entities are another potential source. When registering for a business licence, all companies must submit materials, including information about their bank accounts, to the Administration of Industry and Commerce (AIC). The AIC compiles a Registration Record Book (zhuce dengji bu), which contains among other information a company's financial statements. Although the PRC Company Law (中华人民共和国公司法)provides that the Record Books are supposed to be open to the public, only the courts, procuracy and public security bureau and sometimes lawyers have access. Lawyers must present a court notice demonstrating that a case has been accepted, even though there is no legal basis for such a restriction.

The plaintiff may also obtain bank account information from the tax bureau. Although tax bureau officials are not prohibited by law from providing information about a party's bank accounts, personal connections are usually necessary. The same applies to foreign exchange accounts and other information obtained from the State Administration of Foreign Exchange.

Equity Interests

Some information about a defendant's investments in other companies is often publicly available in the defendant's prospectus or annual report, which may be found in such publications as the China Securities Report or Shanghai Securities. The plaintiff may also find useful information in shareholder meeting minutes, board meeting minutes and financial statements on file with the AIC.

Enforcing against a defendant's equity interest in a non-listed company is relatively straightforward. The court will simply issue a Notice for Assistance in Enforcement to the AIC where the company is registered requesting that the AIC not approve any transfer by the defendant of its interest to a third party or sell off the interest if the plaintiff is successful.

Attaching a defendant's interest in a listed company is more complicated. The court has the legal authority to issue an order to the securities exchanges and securities registration companies to prevent the transfer of state and legal person shares or to auction the shares to pay a debt.1 Sometimes plaintiff's counsel will need to persuade securities exchanges and securities registration companies that the order will not cause the controlling shareholder to lose control of the company or cause a swing in the price of the stock. Despite such difficulties, there have been a number of court auctions of shares in listed companies.

Real Estate and Other Assets

Real estate may be subject to either hard or soft seizure. Soft seizure prevents the party from transferring or encumbering the real estate. Hard seizure prevents the party from using the real estate at all and is more difficult to obtain from the courts.

The plaintiff must provide the court details of the defendant's real estate holdings. Although such records filed with the real estate bureau are supposed to be available to the public, personal connections are often necessary to access the records.

Equipment, cars, boats and other assets are also subject to hard and soft seizure. Patents and trademarks may be attached, although in most cases there is no market for another company's trademark. Certain receivables such as interest payments on State Treasury Bonds can also be frozen, however courts are divided on whether receivables in the normal course of business such as future payments for the sale of goods may be attached.

More Effective Asset Preservation

Asset preservation can be useful in combating fraudulent conveyance of assets, although its effectiveness is diminished by local protectionism, bureaucratic officials and conflicts of interest between banks and the courts. As administrative agencies become more professional and the system becomes more transparent and open, discovery of assets will become easier and asset preservation should become more effective.

Randy Peerenboom (Of Counsel)
and Dacai Zhang
Yi Wen Law Firm
Beijing

ENDNOTES:

1 It is possible although more difficult to attach individual shares.