With judgments and awards involving Chinese entities on the rise, asset recovery expertise will play a key role in creditors’ enforcement and recovery strategies.
As the world’s second largest global economy and with an annual GDP growth of over nine percent on average, the People’s Republic of China is central to business today, and companies around the world do business with Chinese parties. Given its status and key role in the already stressed global supply chain, economic trends in China inevitably cause significant impacts elsewhere in the world.
Soaring global inflation and the rising cost of debt are affecting businesses worldwide, including in China, where issues in the property sector have led to mortgage boycotts and new programs to bail out the mortgage and real estate industries. A recent Bloomberg article indicated that Chinese firms have missed payments on $37.3 billion of offshore bonds in 2022,1 with property developers responsible for nearly all 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 as well as the law firms that represent them.
Given this, 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
These decisions shifted what had been a challenging stance toward enforcement of Chinese judgments by US 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 US states that operate under the Uniform Acts governing foreign judgments, and, further, 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 US.2 And as a further unintended consequence, US 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 US and improves the chances of a US judgment being enforced in China reciprocally.
In addition to US 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 and law firms 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 against 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 US 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. 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 find and hunt down assets in the region. Debt recovery in the region 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 PRC
While 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, will 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 and create complicated corporate structures, including holding companies registered in offshore jurisdictions such as the Cayman Islands or the BVI.
Judgment debtors with an international profile thus 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.
Enforcement is the first step but recovering money requires expertise
To recover judgment debts an aggressive recovery strategy and strong financial backing to hunt down and secure assets are essential. Collecting on large judgments and awards internationally is not easy, which is among the reasons a majority of companies in 2020 had unenforced awards valued at $20 million or higher.3
It is also important to bear in mind that 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 you can or will execute on that decision and recover money.
When evaluating asset recovery services, it’s essential to choose a team that can effectively trace assets in difficult jurisdictions and use that information to realize the full potential of a legal judgment. Even better is a partner that can provide a variety of financing models for that offering, as Burford can in providing asset recovery on a contingent basis or by purchasing judgments outright.
Burford’s team are experts in dealing with and financing collections from opaque jurisdictions and developing a multi-prong recovery strategy involving investigation and proceedings across multiple jurisdictions. As one public example, Burford financed the enforcement of a final and unappealable judgment against the worldwide assets of Russian businessman Farkhad Akhmedov, as well as other judgment debtors and alleged third party beneficiaries. Multiple routes to recovery in ten jurisdictions were pursued by Burford’s asset recovery team, the most visible of which was the debtor’s 370-foot yacht Luna; other assets were pursued globally. The case included multiple contested discovery actions (including against Google), a search order and a three-week trial in England under s.423 of the insolvency act in order to bring action directly against accomplices involved in the evasion of the judgment.
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% of the amount to be restrained in order to secure some interim relief over assets.4 In large complex cases, this can be a huge figure that skews litigation budgets and acts as a disincentive for recovery.
1 Bloomberg Law, China to Require Approvals for Firms to Issue Offshore Debt (1), August 30, 2022, available at: https://news.bloomberglaw.com/capital-markets/china-to-require-approvals-for-firms-to-issue-offshore-debt-1
2 William S. Dodge, “New York’s Appellate Division Holds that Chinese Judgment Should Not Be Denied Enforcement on Systemic Due Process Grounds,” March 15, 2022, available at: https://conflictoflaws.net/2022/new-yorks-appellate-division-holds-that-chinese-judgment-should-not-be-denied-enforcement-on-systemic-due-process-grounds/
3 2020 Legal Finance Report, available at: https://www.burfordcapital.com/insights/insights-container/2020-legal-finance-report/
4 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).