How China Is Trying to Get Debt Dodgers to Pay Up

The draft law also deals with the issue of noncompliance, particularly when it involves a part of the government. Photo: VCG

China is pushing ahead with long-awaited legislation designed to crack down on the dishonest tactics that debtors — including government agencies — use to dodge court orders demanding they repay their debts.

In June, the first draft of the civil compulsory enforcement law was submitted to the National People’s Congress (NPC) Standing Committee for a first reading. Although drafts usually go through three readings before being passed by the top legislature, the submission brings China closer to its first law specifically on the enforcement of civil judgements — something many of the country’s legal experts and judicial officials have been calling for more than two decades.

Chinese courts have long had trouble enforcing civil rulings, especially those involving debt defaulters. Although some creditors have asked the courts to force debtors to pay back what they owe, the lack of clear and specific laws and regulations has prevented the courts from acting effectively. Defaulters have on occasion managed to avoid enforcement by hiding assets or transferring them to other owners.

Legal experts and lawyers have discussed how the law, if passed, can help solve this problem. They told Caixin the legislation aims to give lawyers a greater role in enforcement and significantly increase penalties for avoiding repayment.

These problems have “seriously affected the realization of people’s legitimate rights and interests, damaged public confidence and trust in justice and undermined our judicial credibility,” Liu Guixiang, a Supreme People’s Court official, said at a press conference in 2019.

Court-ordered power

The most prominent problem that Chinese courts face when enforcing civil judgements is locating assets that dishonest debtors may have concealed or transferred to others.

In some cases, debtors have used shell companies to incur debts, which allows them to avoid any court-ordered moves to force repayment in the future because the shell companies don’t hold any recoverable assets, said Du Wendanyang, a lawyer with Shanghai United Law Firm.

In this aspect, the courts are at a disadvantage compared with the debtors, said Xiao Jianguo, a professor at the Renmin University of China Law School. Because courts sometimes can’t locate debtors’ assets to execute a court order, many cases have been put on hold, Xiao said. In the meantime, creditors who have won cases against debtors have grown increasingly frustrated.

To tackle this issue, the legislation gives lawyers the right to investigate a debtor’s assets, so long as they obtain a court order in advance. It stipulates that if a court cannot identify any of a debtor’s assets by searching online platforms, then the creditor can appoint a lawyer to ask for a court order to conduct an asset investigation. The advantage of court order is that anyone who refuses to cooperate with the lawyer’s investigation can face fines, detention or other penalties.

In China, this is called a “lawyer investigation order system,” and has already been used in parts of the country like Shanghai and the provinces of Zhejiang and Guangdong. However, the system suffers from drawbacks because it has never been written into law.

Jurisdiction is another problem. Court orders for asset investigations usually cannot be used outside the region where they were issued, Zhang said. “When executing cases (on courts’ behalf), we have issued hundreds of investigation orders … The percentage of people who were subject to an order but refused to cooperate was as high as 50%,” she told Caixin.

If the legislation is passed, it will mark the first time that the “lawyer investigation order system” gets written into national law.

Lawyers said such court orders also help take some of the pressure off the regional courts’ enforcement officers, who are buried under heavy caseloads.

Harsher penalties

The draft of the civil compulsory enforcement law also contains tougher penalties for dishonest debtors.

According to the draft, a Chinese court can prohibit those who refuse to fulfill their obligations from buying luxury products or other goods that are not necessary for business or daily life. A court can also limit their ability to leave the country.

The legislation proposes fines of up to 1 million yuan ($143,703) per day for institutions that refuse to surrender specific, irreplaceable items such as antiques, and up to 100,000 yuan per day for individuals who do the same. It also specifies what counts as evasion, allowing courts to detain evaders for 15 days at a time and up to six months in total.

These measures have sparked a heated debate among legal experts, with some arguing that the detention measure is not severe enough to effectively deter people who default on purpose to try to avoid repaying their debts.

Dealing with ‘deadbeats’ in government

The draft law also deals with the issue of noncompliance, particularly when it involves a part of the government.

In recent years, hundreds of cases involving government agencies, including delayed payments for government-funded construction projects and those in which agencies have refused to compensate residents for illegally demolishing buildings, have drawn attention to the problem of “deadbeat” debtors within local governments.

In a high-profile case in 2017, the Fengxin county government in Yichun, East China’s Jiangxi province, was listed by a Yichun court as a dishonest civil debtor over a 320-million-yuan contract dispute with two businesses, according to domestic media.

While the central government has been working to crack down on “deadbeats” in government, legal experts said courts have had difficulty enforcing civil judgements against them. The primary reason for this is inadequate legislation, according to Gao Xingge, a lecturer at the Law School of Southwest University of Political Science and Law.

In a paper, Gao wrote that in practice, judicial enforcement personnel fear that execution will undermine the authority of government agencies, which can hurt the public interest.

According to the legislation, which aims to resolve the dilemma, government agencies involved in debt disputes and subject to enforcement must pay their debts on time. Debt can be repaid from the local government’s budget, but only with funds that the local finance department has specifically set aside for the purpose. If a debt has yet to be included in the government budget, the court can notify the troubled agency and the finance department to include the debt in the budget for the current or following year before resorting to court-ordered enforcement measures, the legislation said.

Source:  Caixin Global