In civil litigation (broadly including before court or arbitral tribunal) , especially in commercial cases, it is a universal practice to apply for Property Preservation nowadays. Some courts, especially those in eastern China, have set up a team belonged to enforcement division or case filing division, to deal with application of Property Preservation, the team has been the busiest department of the court for several years. But why?

“Enforcement difficulty” in China

“Enforcement difficulty” is originally used to describe the extensive difficulties a court will meet when an effective judgment to be compulsively enforced, but as from its arising, this problem is far more solved, so as to been repeated many times in high level seminar and now be used as a proper noun. Many Chinese people even who have never been involved in a case are familiar with this term now. That means a litigant who won the case, and although all whose right is certified by court by an effective judgment, but it can’t become an actual interest.

The person subjected to execution in China has a lot of ways to avoid the statutory obligations, and eventually escape its enforcement by the court. If we make a simple classification, the means used to escape from enforcement can be classified into two.

One is by conduct of its own, such as to transfer or conceal property beforehand.

That means the person subjected to enforcement will hide or transfer his property before a judgment come into force. When enforcement applicant apply to court for compulsory enforcement, the person subjected to enforcement had almost nothing can be sold or used to perform the judgment. Transferring bank deposit is the most regular measure, but it is still very effective in China. Theoretically, if the person subjected to enforcement transfer its deposit in a view to avoid compulsory enforcement by court, the property transferred shall be traced back and civil fine can be applied. But the question is the execution applicant usually can’t provide direct evidence to prove that such conduct exists, so the court will not initiate such a tracing back procedure. To collect evidence to prove the illegally escaping is an impossible mission for the applicant, because the bank in which the transferring occurred will not cooperate an investigation carried out by an lawyer entrusted by the applicant on grounds of protecting commercial secrecy of its customers.

The other is by use of the loophole of the legal system, such as abusing the independent personality of a legal person.

Legal person system is transplanted into china when the general principles of civil law promulgated in 1986. Legal person has independent property and liability capability from its shareholders. As you can imagine and widely known by legal professionals, limited liability and independent personality must be accompanied by effective supervision, or it will be abused. But regretfully, such a supervision system has not been set up so far in China. The direct result is the company’s property is mixed up with its owner. There is no specific applicable rules or regulations of supervision to control such mixture. The owner will be very easy to transfer money from its company to his private bank account. When there is a judgment to be enforced, all the company’s property will be transferred to the boss, so there is no property in the company’s bank account to guarantee the statutory enforcement.

A legal system “to reveal the veil of a company” thus transplanted into China, but it can be applied only to a few circumstances under which the claimant has specific evidence to prove the property mixture or abuse of independent personality. At the same time there are no obvious rules applicable nationwide, so far there are no interpretation or other instruction document from the top legislative or judicial institution. The Supreme Court promulgated a case as its 15^th typical case in 2013, which is an “case law” established for disregarding of personality of personality of legal person. Because in accordance with the provisions in Supreme Court stipulation on guidance through cases, its 7^th article stipulate that” in respect to those cases promulgated by the supreme court, the people’s court of all levels shall make reference to in adjudication of familiar cases”. The case is an example established for disregarding of personality of legal person. But it must be pointed out,  “to reveal the veil of a company” can only be used to those cases involved in abusing of independent personality of legal person. The claimant in such case will face great challenge of collecting enough evidence to prove the abusing. In most cases, the claimant, as an outsider, don’t know where and how the boss of company illegally transferred the company’s fund. The claimant and lawyer entrusted can’t obtain such evidence for the protection of privacy from bank law. Without preliminary evidence, the court will refuse application of investigation by itself.

 It is an effective solution to deal with those cases, in which the boss is the only shareholder of the formalized companies, but it is difficult to really reveal the veil of other formalized companies. In accordance with article 64 of Chinese company law, if a shareholder of a one-owner company fail to prove his property is independent from his property, he is subject to joint and several liability with the company in respect of the company’s debt. But for other company, the claimant will meet insurmountable difficult to collect evidence to prove the boss has transferred his company’s bank account.

To initiate litigation, but lose money eventually is a circumstance every plaintiff will not want to see, but it is a common phenomenon in china now. The Supreme Court of China declared it will overcome enforcement difficulty in 2-3 years from 5 2016. There are some substantial development so far, such as announcement of the list of dishonest persons subjected to enforcement, which will prohibit the stipulated dishonest persons subjected to enforcement from traveling by airplane, from obtaining loan. The list is an import step forward, but it is obviously not enough, especially for those they escape their debt from misuse the independent personality of legal person which under their control.

How to do

Just as I have set forth above, Concealing property and misusing the independent personality of legal person is two fundamental means to escape enforcement. We expect improvement in legislation and judicial practice to resolve this problem, but it does no help to current dilemma. We shall not wait passively to expecting good luck or suffer the losses, there must be something we can do actively to avoid this passive situation. Property preservation is the way out.

Nowadays, Chinese court will accept application of property preservation at the time they entertain a case or even before that. That means when you submit the application, the debtor usually don’t know he will face a lawsuit. Of course, there are some instances in which the client insists a lawyer’ letter to be serviced to the debtor at first, but it is perhaps not a correct way to recover money. A lawyer’s letter works as a notification to tell the debtor you will bring a lawsuit and conduct property preservation, that will greatly damage the effectiveness of the following property preservation measures. So it is strongly recommended, except for the defendant is a deep pocket one, the lawyer’s letter shall not be sent before the property preservation.

Of course lucky is still an important factor for the victory of property preservation, Because you don’t know whether there is enough money in the defendant’s bank account, when you apply for the preservation. But sometimes the defendant will transfer money into the bank account which has already been sealed up by reason of having no idea about the sealing up or the bank account having been specified by contract concluded before, and the other party to the contract refuses to make any change.

The cost for application of property preservation is not expensive, it will be no more than RMB 5000 Yuan. But securities stipulated by civil procedure law must be provided for the application to be permitted by the court. Nowadays, the claimant may buy a Preservation Policy from insurance company, which is extensively acceptable by Chinese court and its cost also acceptable.