Supreme People’s Court reports on its bankruptcy accomplishments

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The warm sun and shopping mall Christmas decorations were not what drew Supreme People’s Court (SPC) President Zhou Qiang and a large group of senior court and other government leaders to Shenzhen on Christmas Day–it was a rare national bankruptcy trial work conference. It sends signals about the importance of bankruptcy post 19th Party Congress.

This appears to have been one of the last official activities of Grand Justice Du Wanhua, who has taken the lead in promoting bankruptcy work in the courts (see earlier blogposts) and is a classmate of President Zhou Qiang. Du, who turns 64 in January, is retiring.  Takeaways from the conference include:

  • some statistics;
  • the latest political/professional policy on bankruptcy;
  • some informed comments on where the challenges are (with some of my further comments in italics).

Statistics

The Chinese courts accepted 8984 bankruptcy & compulsory liquidation cases in 2017 (through 21 December), heard by 97 bankruptcy divisions (up from 6 in 2016, a consequence of a 2016 SPC notice, described here).  The courts concluded 4404 bankruptcy cases through November.

Reforms aimed at speeding up cases moving from enforcement to bankruptcy proceedings are showing some initial success, with the Guangdong courts handling over 43,000 in the second half of 2017, of which 10,000 were handled by the Shenzhen courts.

Latest bankruptcy policy statements

President Zhou Qiang conveyed the macro policy on bankruptcy.

  • adhere to problem orientation (必须坚持问题导向) (one of the current political slogans);
  • if at all possible, merge or reorganize, less bankruptcy liquidation 尽可能多兼并重组,少破产清算 (the current policy);
  • Explore establishing a simplified procedure and a pre-reorganization system (简易破产程序、预重整制度) (this idea, a borrowing of pre-packaged administration from US/English law has been discussed by academics and others for some years, but this prominence seems to be new.  Pre-packaged administration is a bankruptcy/insolvency procedure under in which a company arranges to sell all or some of its assets to a buyer before appointing an administrator to facilitate the sale. It involves a company’s institutional creditors agreeing to it, so it is understandable that would be an attractive idea in China);
  • intermediate courts in larger cities and economically developed areas should establish bankruptcy divisions or collegial panels (this follows from an announcement in 2016, discussed here);
  • use informatization to improve the hearing of bankruptcy cases (信息化建设提高破产审判质效).

Du Wanhua had more specific signals to the lower courts.

  • improve professionalism;
  • improve the bankruptcy administrator system, promote establishing a bankruptcy administrator society, bring in a competitive system;
  • improve the enforcement to bankruptcy system,  accelerate cases that can’t be enforced transferred to bankruptcy proceedings;
  • use reorganization as much as possible through the market and legal methods to save companies in trouble;
  • establish a normalized government/courts unified coordinated system (要建立常态化的“府院破产统一协调机制”), protect the rights of each party on an equal basis;
  • use informatization.
  • handle carefully bankruptcy cases involving debts that are mutual/joint guarantees, guide financial creditors to convert the debt into equity or other methods that simplify the debtor relationship and enable the company to survive;
  • handle carefully the consolidated bankruptcy of affiliated companies, balance the conflicts between the rights and interests of each party.
  • improve cross-border bankruptcy trial work.

 On problems facing bankruptcy courts

Professor Li Shuguang of the China University of Political Science & Law, one of the preeminent Chinese bankruptcy law scholars, who attended the conference, had informed comments, citing the following challenges for the bankruptcy courts:

  1. The relationship between the courts and government when hearing bankruptcy cases needs to be resolved. (Despite the official talk of a united approach by courts & government, discussed above, it remains a challenge. For some local color, see this excerpt from an article by a team of Zhejiang bankruptcy judges on real estate developer bankruptcy:

If a real estate developer is having a crisis, government will involve itself first, and only if administrative measures don’t work, will they think of judicial measures. This creates problems in transitioning from administrative to judicial procedures. For example, how should a court treat the legal authority of the creditor settlement arrangement of the special work team formed by government to deal the crisis? Once the company goes into bankruptcy procedures, government hasn’t withdrawn completely, and on the one hand, all sorts of bankruptcy matters require coordination and cooperation by many government departments, and on the other hand government will give instructions and suggestions about bankruptcy work, considering the needs of the local economy, stability, and other interests.

3.  Many local courts are afraid to accept bankruptcy cases and even establish unreasonable barriers to for local protection–new systems need to be put in place.

4.  On bankruptcy administrators, there need to be more detailed rules on selection, oversight, administration, operation. [I can testify to this, based on the questions raised on one of my Wechat chat groups about bankruptcy administrators and the many articles published on bankruptcy law-related Wechat public accounts.] 

5. Professor Li asks how Chinese bankruptcy law can be reformed to effectively rescue companies, to enable courts to identify salvageable companies, properly protect the rights of creditors and shareholders.  More detailed rules are needed on preferences in bankruptcy.  These are ongoing issues for Chinese bankruptcy courts, as the current system protects local government interests.

6.  There exist a group of specific issues related to bankruptcy liquidation, such as how to expand the pool of assets available to the creditors, balance the interests of various creditors, deal with the relationship between creditor committees (under the bankruptcy law) and financial institution creditors committee (these committees were put in place from 2016, see more details here).  This also relates to issues of transparency and procedure, particularly what information will be available to members of the creditor committee, and at what point. An important area where legal infrastructure is lacking, as discussed in this Wechat article.

Among those issues is how to protect the interests of consumers who have purchased property from a bankrupt real estate developer.  This is an important practical issue for all involved (including local governments) because an increasing number of real estate developers are going into bankruptcy.  A recent Wechat article analyzes a 2015 SPC ruling that requires the bankruptcy administrator to perform the purchase and sale contract where payment has been made in full.  In practice, courts take different approaches to variations on this scenario.

7.  He echoes Du Wanhua on issues related to consolidation of bankruptcy cases involving corporate affiliates and the transfer of cases from enforcement to bankruptcy, raising the problem of the courts performance indicators.

8. Professor Li opens up the issue of “informatization,” so that it becomes a platform collecting and analyzing bankruptcy data, and information sharing mechanism for all involved.  This comment echoes my own experience that the electronic platform is not helpful for a researcher seeking access to bankruptcy documents, as few are accessible, not even those that are otherwise publicly available. Some bankruptcy judges have responded to my discrete inquiries that little information is available because it is possible to set access restrictions on information.)

9.  He raises the increasingly prominent issue of cross-border bankruptcy, in which judges lack legislation and experience to deal with these issues, and suggests that at an appropriate time harmonization of Chinese cross-border bankruptcy standards with international ones.  By this, he is likely referring to the UNCITRAL model law on cross-border insolvency.  These issues are ongoing ones for the professional community in Hong Kong and increasingly in the rest of the world, see this law firm alert. This has been a frequent topic of academic analysis.

Finally, Professor Li states (what is clear from the comments above) that bankruptcy legislation is inadequate–the judicial interpretations the SPC has issued. deal with only a small portion of the outstanding issues and there isn’t time to draft a long judicial interpretation.  As judges are hearing bankruptcy cases, large numbers of technical issues have arisen [I can testify to this, based on the questions raised on one of my Wechat chat groups.]  SPC academic journals and academic studies address specific issues, see these articles. Professor Li suggests that a “conference summary” be issued based on this conference and input from bankruptcy court professionals. (A conference summary is explained in this blogpost.)

Quick comment

Finally, this area of law is a microcosm of issues facing the Chinese courts, whether it is the requirement for the SPC and lower courts  to reflect current Party/government policy in what they do, relationship between the courts and government, issues with judicial professionalism, large number of technical issues but a lack of legislation, related issues that affect the ordinary person, consideration of foreign law models, and the disconnect between international and Chinese practice.

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December update on judicial review of arbitration

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photo of Beijing traffic, December 2017

The latest buzz within the Chinese international commercial legal community on Belt & Road related legal developments appears not to have surmounted the Great Wall of the Chinese language. The buzz is that a comprehensive judicial interpretation relating to arbitration is on route to promulgation.

On 4 December the Supreme People’s Court (SPC) issued a news release that its judicial committee had approved a judicial interpretation on judicial review of arbitration in principle, entitled Provisions on Some Issues Related to the Trial of the Judicial Review of Arbitration (Judicial Review of Arbitration Interpretation) (最高人民法院关于审理仲裁司法审查案件若干问题的规定).  “Approval in principle”  (原则通过) is not mentioned by the SPC’s 2007 regulations on judicial interpretations but is one of the SPC’s long-established practices.  It means that the judicial committee has approved it, subject to some “minor” amendments. Minor amendments are more than typographical errors and relate to specific substantive matters.  However, the news release did not specify what those “minor” issues were or set a deadline for issuing the interpretation. In December of last year (2016), the SPC’s judicial committee also approved in principle the #4 Company Law interpretation, but that interpretation was not formally issued until August of this year. This observer surmises (without any basis in facts or rumors) that the interpretation will be promulgated before Chinese new year so it can be one of the 2017 accomplishments of the SPC’s #4 Civil Division (but then again, that may be overly optimistic.

The new interpretation will focus on the issues that courts frequently encounter when arbitration-related cases come before them, dealing with gaps in current judicial interpretations (and likely the outdated Arbitration Law, (The Arbitration Law is also the subject of discussions among practitioners, academics, and others.)  The interpretation will incorporate new provisions on the types of cases, case acceptance, jurisdiction, procedure, the application of law and other questions.  It appears that it will incorporate the provisions described in the Notice concerning some questions regarding the centralized handling of judicial review of arbitration cases (the subject of the last blogpost).  It is hoped that the new interpretation will provide for a hearing procedure when cases involving the SPC’s prior approval procedure.

For those not familiar with the intricacies of China’s judicial review of arbitration issues, a 1995 SPC circular sets out a prior approval procedure, requiring local  court rulings to refuse to enforce foreign-related/”greater China”/foreign arbitration awards to be submitted for eventual review by the SPC.  It is currently an internal administrative type procedure, with no explicit option of a hearing.

The SPC announcement described the drafting of the Judicial Review of Arbitration Interpretation as having begun in 2016.  This blog reported in late 2014 that Judge Luo Dongchuan, then head of the SPC’s #4 Civil Division, mentioned that a new judicial interpretation on the judicial review of arbitration-related issues will go into the Court’s judicial interpretation drafting plan in 2015 and that the SPC intends to reform jurisdiction in judicial review of arbitration issues, to consolidate them in specialized courts.

A follow up post will describe the latest buzz on the Belt & Road international commercial tribunal.

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SPC reveals new Belt & Road-related initiatives

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Judge Liu Guixiang (SPC judicial committee member & head of #1 Circuit Court) speaking at conference

In late September (2017), the Supreme People’s Court (SPC) held a Belt & Road judicial conference with senior judges from 16 jurisdictions in the desert oasis of Dunhuang, famed for its Buddhist caves.  As is its custom at its international conferences, the SPC released some information concerning previously unknown cross-border related initiatives, both of which have implications for the international business and legal communities.  The English language reports of the conference (in China Daily and related media outlets)  missed the implications.  A brief article in one of the SPC’s Wechat accounts reveals that:

  • SPC is drafting a judicial interpretation on the recognition and enforcement of foreign civil & commercial judgments (关于承认和执行外国法院民商事判决若干问题的规定);
  • SPC is considering establishing a Belt & Road International Commercial Court (literally “Tribunal”) (“一带一路”国际商事法庭). (chief of the SPC’s #4 Civil Division, Judge Zhang Yongjian, must have been speaking of this when he was interviewed during the 2017 National People’s Congress meeting).

Enforcing foreign civil judgments

A recent decision by a Wuhan court to enforce a California default judgment has received worldwide attention, both professional and academic. with some noting nothing had really changed and Professor Donald Clarke correctly wondering whether an instruction had come from on high.  With this news from Judge Liu, it is clear that the Wuhan decision is part of the Chinese courts’ rethink of its approach to recognizing and enforcing foreign court judgments.

Judge Liu revealed that the judicial interpretation will set out details regarding the meaning of “reciprocity” and standards for applying it (明确互惠原则具体适用的标准).  In another recent article, an SPC judge considered the matter of reciprocity in more detail.  Among the issues she mentioned were: 1) China not being a party to the Hague Convention on the Choice of Courts (this obstacle has been removed as China signed the Convention on 12 September 2017 (this article has a good overview); 2) China should actively participate in the drafting of the Hague Convention on the Recognition & Enforcement of Foreign Judgments (this seems to be happening, as this blog has reported).  The SPC judge recognized that the current Chinese position has significant limitations and can lead to a great deal of parallel litigation (see Professor Vivienne Bath‘s scholarship on this).  The SPC judge also suggested that the standards set out in mutual judicial assistance agreements could be useful in drafting standards for reviewing the recognition and enforcement of foreign judgments.

Belt & Road Commercial Court

Judge Liu also mentioned that the SPC would establish a Belt & Road dispute resolution mechanism and that the SPC was considering a Belt & Road commercial tribunal, to provide the parties of OBOR countries with fair, efficient, and low-cost one-stop legal services.  It is clear from discrete developments that the SPC is looking to Singapore’s International Commercial Court and the Dubai’s International Finance Centre Courts (DIFC).  One of those discrete developments is the cooperation agreement that the Shanghai Higher People’s Court and Dubai International Finance Centre Court signed in October 2016 (reported here), which must have required the concurrence of the SPC. The other discrete development is the memorandum of understanding on legal and judicial cooperation between the SPC and Singapore Supreme Court, signed in August 2017, relating to mutual recognition and enforcement of monetary judgments, judicial training for judges, and the Belt & Road initiative.

The details of the SPC’s  Belt & Road commercial court (tribunal) are yet unclear.  Both the DIFC and Singapore International Commercial Court have a panel of international judges, but a similar institution in China would be inconsistent with Chinese legislation.  The SPC is clearly interested in promoting mediation to resolve Belt & Road disputes. This interest is visible from the September 2017 International Mediation conference in Hangzhou, at which Judge Long Fei, director of one of the sections in the SPC’s Judicial Reform Office, spoke on the benefits of international commercial mediation.

Perhaps the SPC envisions an institution analogous to the Asian Infrastructure Investment Bank and plans to cooperate more on resolving Belt & Road commercial disputes with UNCITRAL and other international organizations.  We will need to see how this further develops.

It is also unclear whether the SPC will issue a draft judicial interpretation or draft regulations on the Belt & Road dispute resolution center for public comment.  Although President Zhou Qiang and Executive Vice President Shen Deyong speak of the benefits of judicial transparency, it seems the benefits of public participation in judicial interpretation drafting /rule-making have yet to be fully realized.

 

Chinese courts & formality requirements

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Hong Kong Apostille (from internet)

In February, 2017, the Supreme People’s Court (SPC) issued its second judicial transparency white paper, giving the official version of what the SPC has done to respond to public demands for greater transparency about the Chinese judicial system. But what are the voices from the world of practice saying? One of the issues (for a small but vocal group, foreign litigants) is inconsistent and non-transparent formalities requirements.

Chinese civil procedure legislation requires a foreign litigant to notarize and legalize corporate documents, powers of attorney & other documents. It is a time consuming and costly process, with some jurisdictions providing documents that do not meet the expectation of Chinese courts.   China is not yet a signatory to the Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents  (Hague Legalization Convention)   which substitutes the faster and cheaper apostille process (note that Hague Legalization Convention continues to be applicable to Hong Kong and Macau under the terms of the joint declarations and Basic Laws for each Special Administrative Region (SAR)).  About one year ago, a Ministry of Justice official published a Wechat article discussing the benefits of the Hague Legalization Convention (as well as the issues facing China in implementing it).

While this article addresses issues faced by foreign plaintiffs seeking to challenge Trademark Review and Adjudication Board decisions in the Beijing Intellectual Property Court (Beijing IP Court), according to other practitioners (who have asked not to be identified), these problems with inconsistent (and non-transparent) requirements concerning legalizing foreign corporate documentation are not limited to the Beijing IP Court, but face foreign parties appealing from intermediate courts to provincial high courts elsewhere in China. These requirements can have the effect of cutting off a party’s ability to bring an appeal, for example.

What is the solution?  The long-term solution, of course, is for China to become a signatory to the Hague Legalization Convention.  In the meantime, Chinese courts should be more transparent about their formalities requirements.  These requirements affect all foreign parties, whether they are from One Belt, One Road  (OBOR) countries or not. If China is seeking to become an international maritime judicial center or hear more OBOR commercial cases, the Chinese courts need to become more user friendly.  Courts with significant numbers of foreign cases (Beijing, Shanghai, Shenzhen….) can consider reaching out to the foreign chambers of commerce, many of which have legal committees, to understand in greater detail what specific problems foreign litigants face (and convey their views to foreign audiences). Resolving this issue can create some goodwill with the foreign business community with relatively little effort.

 

Welaw Monitor (微律观察) #2

I am traveling at the moment, so my time to review articles published on Wechat is limited.  But below are some links of interest.

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Huazhen (Flower Town) emotional counseling

Oldies but goodies

Several prominent media sources, the South China Morning Post among them, are running articles on China’s clean-up of the financial sector, this one pointing to the government’s focus on privately owned insurance companies.

But those reading Wechat would have known that several years ago, China’s legal analysts had been writing  articles such as “China’s private entrepreneurs are all on their way to jail  or China’s businesspeople are either in jail or on their way to jail. 

China’s Good Samaritan case Peng Yu back in the news-  a backgrounder plus-retired SPC judge Cai Xiaoxue criticizes as does former judge & Peking U Professor Fu Yulin.

Detention Center Law draft

The Ministry of Public Security (MPS) has recently issued its draft Detention Center Law for public comments (link to Chinalawtranslate.com’s translation.  The draft has caused a great deal of comment within China and those concerned about the treatment of fellow human beings in criminal detention in China should read these articles:

The MPS is drafting the Detention Center Law, but the entire legal world is opposed

10 years of calls for separating detention from criminal investigation

Professor Chen Ruihua, defects of the detention system and how it should be reformed

Professor Chen Ruihua–the detention centers should be transferred to the justice authorities

Commercial law

China’s distraught buy online counseling packages, but does China’s consumer protection legislation protect them if there are no standards for counseling?

Party discipline

A Cangzhou court president is under investigation. Is it connected to the strip search of a woman lawyer?

In CCDI hearing procedures, will evidence provided by the accused be considered?  The answer is, the scope is limited

Criminal law

Three SPC judges (likely to have been on the drafting team) unpack the asset recovery regulations (discussed in this January blogpost). It shows they looked to foreign legislation when doing so;

 20 years of bribery prosecutions, with 9 acquittals

SPC on anti-drug day, with white paper and 10 typical cases

Is it rape if the sexual contact comes after the coercion?

Supervision Commission

The first father’s day after being transferred to the Supervision Commission

Labor law

Does “remote working” in China mean the place of employment has changed?

Don’t make these 10 mistakes when terminating employees

Family law issues & property

Leta Hong Fincher’s book Leftover Women discusses the Marriage Law interpretation & home purchases.  This Wechat post sets out a chart with various scenarios related to marriage & home purchase--a very handy reference.

Bankruptcy

10 typical bankruptcy cases from Suqian, Jiangsu Province, including some real estate companies

Chongqing courts borrow concepts of personal bankruptcy from abroad when dealing with private (shadow) borrowing cases

The many inadequacies in China’s non-performing asset legislation

Judiciary

A review of the Party’s work at the SPC since the 18th Party Congress

 

 

 

 

Welaw Monitor (微律观察) #1

I am tweaking the type of content on the blog, cutting down on the long analytical blogposts.   I will provide links to reports and analysis on court and other legal matters on Wechat. I am concentrating on writing a book and some other related writing and editing projects.

It remains my hope that some followers with the financial wherewithal to do so will consider supporting (in some fashion) the blogs that are enabling the English speaking and reading public to perceive (through translation or bite-sized analysis) the “elephant” that is the Chinese legal system, among them Chinalawtranslate.com and this blog.

Commercial law

14 situations where the corporate veil can be pierced

Criminal law

Public security v. SPC & SPP on what is prostitution–does that include other types of sexual services?

SPC vice president Li Shaoping on drug crimes–relevant sections of Criminal Law should be amended, better evidentiary rules needed for drug crimes, & death penalty standards need to be improved

Hebei lawyer’s collateral appeal statement, alleges torture during residential surveillance, procedural errors (part of China’s innocence project

China’s financial crime trading rules are unclear

Defendant changed his story on appeal but the appeal court ruled he was the killer

25 criminal law case summaries from People’s Justice magazine 

Criminal procedure law

public security does not want the procuratorate supervisors in police stations

A corrupt official’s polygraph problems

Supervision Commission

Its power should be caged

Beijing supervision authorities take someone into custody, will shuanggui be abolished?

Party discipline

On confession writing

10 No nos for Party members using Wechat

Administrative litigation law

SPC issues 10 typical administrative cases, including one involving the Children’s Investment Fund

Those disputing compensation for expropriation of rural land must first apply for a ruling–land is now part of the Harbin Economic and Technical Zone (unpacking of  case #46 of #2 Circuit Court’s case summaries)

Labor law

Important study by the Guangzhou Intermediate Court on labor disputes 2014-16, with many insights & a section devoted to sex discrimination issues

Don’t make these 10 mistakes when terminating employees

Family law

Status report on family court reforms (& difficult issues for judges)

 Why it’s so hard to deal with school bullying in China

How juvenile justice should be improved (the semi-official view)

Judiciary

300 cases in 100 days–a team of young judges & expedited criminal cases

Environmental Law

Procuratorate has brought 79 public interest law suits in Yunnan (press report)

Bankruptcy

Why bankruptcy is so difficult and what needs to improve

Lawyers

 legal qualification system needs changing, the profession needs those with non-law undergraduate training

 

 

 

Private lending leaves the shadows for the courtroom

Supreme People’s Court (SPC) President Zhou Qiang’s report to the National People’s Congress in March of this year omitted data on private lending disputes.  In 2016, Zhou Qiang stated that the courts dealt with approximately 1.5 million cases, up 41% from the year before. According to a widely cited study issued in November, 2016, private lending disputes were the leading type of  civil dispute in the Chinese courts in 2011-2015.  Data on private lending disputes in 2016 seems to be missing from year end reports by many local  courts, although the the SPC is promoting the use of big data.  The report discussed below is an exception to the general trend this year. Beijing’s Chaoyang District  Court, one the busiest basic level court in China, recently published a report on private lending cases.

Data from Beijing’s Chaoyang District, numbers of cases accepted, 2013-2016:

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2013-16, number of private lending cases accepted

The court noted that the year on year growth rate for private lending cases was 8.1% (2013-2014), 128.9% (2014-2015), 160.3% (2015-2016), with 2016 cases over five times the number in 2013. In the first four months of 2017, the Chaoyang  court accepted 8777 new cases. The court expects the number of private lending cases to increase substantially during 2017.

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2013-16 cases , amounts in dispute, in units of 100 million RMB

Cases involving large amounts in dispute are on the rise: in 2013, 21 cases involved more than 10 million RMB, 31 in 2014, 61 in 2015 and 95 in 2016, with one case in 2016 involving 96 million RMB.  Total amounts in dispute in 2016 were over 821 million USD.1f8c0005df46479e9f11

Comments by court researchers:

  • Almost 1/3 of the cases involved one company.
  • Many of the cases involve P2P platforms (no specific numbers supplied);
  • because insufficient information is supplied, courts have problems serving process;
  • many platforms circumvent the restrictions on the rate of interest by imposing intermediary fees;
  • the loan agreements are badly drafted, making it difficult for judges to decide these  cases;
  • Few cases were settled and over 20% were default judgments.

Comment

Failing to release judicial statistics about private lending on a national level does not send positive signals about the state of judicial transparency, but does indicate the way that the SPC needs to serve government strategies.  These statistics, at a local level, do send signals about the state of the economy. Their absence at a national level does not mean the underlying economic concerns have vanished. Further concerns are raised by the fact that the Shanghai Justice Bureau, as of early April, has ordered public notaries to stop notarizing private lending agreements (notarizing an agreement makes court enforcement easier