Looking back at the legal services I have provided to clients over the past two years, I have seen a significant increase in the number of debt recovery cases. Not to mention the reasons for this phenomenon, such as the impact of the Covid-19 epidemic, and the downturn in economic conditions, what I want to share with you today is some basic knowledge about recovering debts in China, so that one day in the future when you or your friends encounter such problems, you can better deal with them.

Before we start the discussion, we need to clarify a few questions first:

The arrears discussed here are not the remuneration owed in a labor relationship.

  • The arrears we discuss here are just the arrears formed in a general transaction relationship.
  • These arrears may come from sale of goods, provision of services, the reception of funds, etc. These relationships are usually related to contracts, so most of them fall under the laws of the Contracts Chapter of the Civil Code. Conversely, if you are an employee and you are looking for arrears that your employer owes you for your work, then such arrears are usually governed by Chinese labor laws. This kind of unpaid work remuneration is not in the scope of our discussion today, you can refer to my previous article on labor disputes.

2. The debtor still exists.

This question may sound odd, but it is a real concern. If it is a company that owes you money, then you should investigate whether the company has been written off or liquidated, otherwise, you will most likely have to go to its heirs, such as its shareholders, to claim what owed to you and this often complicates the recovery process. If it’s an individual who owes you money, then if he’s still alive (otherwise you’ll also have to consider finding his heirs), you may want to find out his residential address in order to send him a reminder or to serve him the legal documents in the future when you sued him. Usually, researching an individual’s address is a little more difficult than researching a company’s, because the company’s registration information is public and you can easily find it online.

3. The arrears have not been forgotten for a long time.

This question also sounds interesting. According to Chinese law, from the due date of the arrears (that is, when the debtor should pay you back), if you have not asked the debtor for the arrears within three years, then the debtor has the right to claim that the statute of limitations has expired and refuse to repay the arrears. Note that if you have ever claimed the debt from the debtor in any way, whether in writing or orally (of course, you have to prove it) within three years, it means that the debt has not been forgotten, then from the date you made such claim, you will gain an additional three years to continue the right of recourse the amount owed. Simply put, you need to make sure that you remember the arrears people owe you and make sure to regularly ask for them from the debtors in order to renew the 3-year statute of limitation, even if the debtors may ignore your such demands and do not respond at all.

Then, here are some common ways of recourse to arrears. I will also list some characteristics of each of them.

  1. Friendly negotiation/negotiation. Chinese law does not require the plaintiff to negotiate with the defendant before suing, even if both parties agreed in the signed contract that amicable negotiations should be conducted in the event of a dispute. Since for most debt recovery cases the court will first organize a mediation, so even if you and the debtor never had amicable negotiation in advance, you can still go directly to the court to sue him. However, as a lawyer, I still recommend that you try to start your arrears recovery action by negotiating amicably. This is because friendly negotiation is usually the least expensive act. In order to better proceed, you may need to do some preparations, such as sorting out the evidence of arrears, finding out some legal provisions, etc., so as to let the debtor know that you are serious about this negotiation.
  • Send out an official letter. If you are representing a company, it is often more effective to send an official letter to the debtor in the company’s name than to only negotiate verbally. Such an official letter should carry your company’s official seal and detail the facts related to the arrears. The official letter should also state the amount, method and time limit that the debtor should repay. If you are an individual, you can also write an official letter to the debtor to put the relevant facts in writing. Please remember to keep the mailed receipts, such as courier receipts, etc.
  • Send a lawyer’s letter. If you have tried the above actions and nothing is working, then you may consider hiring a lawyer to send a lawyer’s letter to the debtor in the lawyer’s name. According to the provisions of Chinese law, lawyers usually need to review the basic case facts and evidence before sending a lawyer’s letter, so as to confirm that the relevant arrears facts are true and valid, and you do have the right to claim the arrears from the other party. Furthermore, sending a lawyer’s letter is considered a formal legal act, which usually indicates that if the debtor remains ignorant, he is likely to be soon sued in court. So a lawyer’s letter will usually be more effective than your own recourse action above, however, there are still some debtors who will turn a blind eye to the lawyer’s letter. At this point, you may want to consider a civil proceeding.

4. File a civil lawsuit.

In China, filing a civil procedure is usually handled by a lawyer. Chinese law does not prohibit the parties to sue and express their opinions by themselves in court, but this may not be very effective. After all, lawyers are professionals who have received many years of specialized education and training. If you decide to file a civil lawsuit, you need to prepare evidence in advance. In addition, you should also determine the address of the defendant in advance so that the court can help you effectively serve the documents in the future. If you are concerned with court fees, the good news is that Chinese court fees are not high, usually no more than 2% of the amount owed, and the higher the disputed amount is, the smaller the percentage of such fees will be. When you file a civil lawsuit, you may also consider applying to preserve the defendant’s assets, and be prepared to apply to the court to help you enforce the judgment against the other party’s assets if you win. Asking a lawyer about these things is the best thing to do.

Finally, a question I am often asked is if the debtor is sued, can the debtor be required to pay for my attorney’s fees and other expenses?

In China, the court’s litigation fees, preservation fees, and execution fees can be borne by the losing party (provided you win the case), but attorney fees and appraisal fees, except in some very special cases, are usually not allowed to be borne by the losing party, unless it is agreed in the signed contract with the two parties in advance that the breaching party shall bear these expenses. Therefore, this is why many contracts will clearly state that the non-compliance party should pay for the expenses incurred by the defaulting party to recover the arrears.

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