Category Archives: Commercial law

What’s new in the Supreme People’s Court’s diversified dispute resolution policy?

Opening of court-annexed mediation center of Qianhai court
Opening of court-annexed mediation center of Qianhai court

On 29 June 2016, the Supreme People’s Court (SPC) issued a policy document on diversified dispute resolution (Opinion on the people’s courts more deeply reforming the diversified dispute resolution mechanism) (Diversified Dispute Resolution Opinion)(关于人民法院进一步深化多元化纠纷解决机制改革的意见). The document uses the term “diversified dispute resolution” (consistent with Chinese practice) rather than “alternative dispute resolution” (more often used outside of China) to reflect the central place of mediation, arbitration, and conciliation in Chinese dispute resolution. (This post has been superseded by the 31 July version.)

It was accompanied by regulations on court-appointed mediators.  For those interested in the way the SPC works, it is another example of an SPC policy document in the form of an “opinion” (discussed here) accompanied by regulations  (a type of judicial interpretation, discussed here).

The policy document sets out in a consolidated form the SPC’s latest policies on mediation, arbitration, and its relationship with litigation.  It provides a framework for further reforms. It is intended to inform the lower courts as well as related Party/government agencies of forthcoming reforms.  It signals to the central leadership that the SPC is on course to achieve one of the reform targets set out in the 4th Court Reform Plan. The current head of the SPC’s judicial reform office, Judge Hu Shihao, spoke at the press conference announcing the Diversified Dispute Resolution Opinion, indicating that the office took the lead in drafting it.

A summary follows below, highlighting, based on a quick reading, focusing on its:

  • objectives and origin;
  • signals and practical implications.

A very useful academic article on diversified dispute resolution, with survey data and more on the political background, can be found (behind a paywall) here. (To the many academics and practitioners who have written on this topic, please feel free to use the comment function or email to expand/contradict, or correct this).

Objectives & origin

The SPC issued the Diversified Dispute Resolution Opinion as a way to implement one of the targets in the 4th Judicial Reform Plan:

46. Complete diversified dispute resolutions mechanisms.Continue to promote mediation, arbitration, administrative rulings, administrative reconsideration or other dispute settlement mechanisms with an organic link to litigation, mutually coordinate and guide parties to choose an appropriate dispute resolution. Promote the establishment of dispute mechanisms that are industry-specific and specialized in the areas of land requisition and property condemnation, environmental protection, labor protection, health care, traffic accidents, property management, insurance and other areas of dispute, dispute resolution professional organizations, promote the improvement of the arbitration systems and administrative ruling systems. Establish an operating system that links people’s mediation, administrative mediation, industry mediation, commercial mediation, and judicial mediation. Promote the legislative process of a diversified dispute settlement mechanism, establish a system for a systematic and scientific diversified dispute settlement system.

The Diversified Dispute Resolution Opinion is a product of the 4th Plenum decision. Its underlying approach was approved by Xi Jinping and other top leaders.  Judge Hu, who mentioned  at the press conference that at a 2015 meeting, the Leading Small Group on Comprehensive Reform approved a framework policy document (not publicly available) on improving the diversified resolution of disputes (关于完善矛盾纠纷多元化解机制的意见) and the General Offices of the State Council and Central Committee followed with an implementing document.  The principal reason that this topic merited top leadership time and involvement is because of its direct links to maintaining social stability and reducing social disputes.

Similar to other SPC policy documents discussed on this blog, comments on the draft were sought from the central authorities, lower courts, relevant State Council ministries and commissions, industry association, arbitration organizations, scholars, and the Legislative Affairs Commission of the National People’s Congress Standing Committee. The Diversified Dispute Resolution Opinion was approved by the SPC judicial committee.

Signals

The objective of the document is to promote a more sophisticated, efficient, and effective approach to dispute resolution that will reduce social tensions.  Part of the objective is to reduce the number of cases filed, heard, and tried by courts. For commercial disputes, it is intended to push disputes to institutions that can more competently, efficiently and timely mediate cases and better mediate cases within the courts by involving court-annexed mediators, before or after the person or entity files suit.  The implications of this document for the reform of labor and rural land contract dispute resolution remain to be seen.

The Diversified Dispute Resolution Opinion requires better linkages between other institutions and the courts, so, for example, that mediation agreements can be enforced without a re-hearing in the courts.  It stresses Party leadership while emphasizing that forces in society can do a better job of dispute resolution than official ones.  The document also cautions against borrowing institutions wholesale from abroad.

Practical implications to expect in the medium to long term

  • For the foreign investment community (and their lawyers), a signal that the SPC is working on a judicial interpretation concerning the judicial review of foreign and foreign-related arbitral awards (“standardize judicial review procedures for foreign-related and foreign commercial arbitration awards”) (规范涉外和外国商事仲裁裁决司法审查程序).  As this blog has reported earlier, this was signaled at the November 2014 National Conference on Foreign-related Commercial and Maritime Adjudication and last year’s One Belt One Road Opinion.  It is unclear whether the future interpretation will change the prior reporting procedure, for example, to give parties a chance to submit arguments orally or in writing, or whether it is intended to consolidate the principles the SPC sets out in its responses to lower courts (released to the public in one of the SPC’s publications), summarized in comprehensive overviews of Chinese arbitration law, such as this one.
  • Changes to labor dispute resolution, as highlighted by the 2015 Central Committee/State Council document mentioned earlier. This is important in light of the uncertain economy and increasing number of workers being made redundant. in recent years, judges in different areas of China have published devastating criticism of the current labor arbitration system and labor dispute resolution generally.  The judges pointed out the current labor arbitration system is not independent of the government, fails to protect labor interests equally, and .  The judges also criticize the brief statute of limitations in labor disputes and lack of a specialized labor tribunal.  It appears from reports that Zhejiang Province is taking the lead in providing greater choices and professionalism in labor dispute resolution, but it unclear how far those reforms go.
  • Further attention to rural land arbitration.The Diversified Dispute Resolution Opinion mentions better linkages between the courts and rural land arbitration. This area is important, as the government seeks to encourage farmers to expand their landholdings and mortgage their land, but the merits of the system are not the SPC’s issue.  A 2014 report highlights the lack of independence of these arbitration commissions, lack of arbitrators, and absence of qualified arbitrators. A 2016 paper by several China Banking Regulatory Commission staff on the mortgage of rural land notes that those arbitration commissions need improving.
  • Local courts to establish “court-annexed mediation centers” to encourage and give parties “one stop shopping” for choices in mediating some of the cases most often seen in the courts–family, conflicts between neighbors, consumer, small claims, consumer, traffic accident, medical disputes;
  • “Improving” criminal conciliation and mediation procedures.  Reforms in this area bear close monitoring because, as discussed in earlier blogposts, criminal conciliation and mediation procedures are often used to avoid embarrassing more powerful institutions (such as schools) and people especially in cases involving claims of rape, sexual assault, and child molestation;
  • recognizing the results of and encouraging litigants to use neutral valuation organizations, for civil and commercial disputes such as medical, real estate, construction, intellectual property, and environmental protection, the results of which could be used as the basis of mediation;
  • More small claims and expedited procedures for minor civil disputes;
  • more lawyers to be appointed as court-appointed mediators;
  • Improvements to administrative dispute resolution procedures.

What does all this mean for making people “feel justice in every case”  when some persons and institutions enjoy a better quality of dispute resolution than others?

 

 

 

Company Law interpretation improving minority shareholder rights issued for public comment (updated)

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soft consultation meeting on draft in 2015

You have less than one month to provide your views to the Supreme People’s Court (SPC) and influence the SPC’s thinking on Company Law issues. The SPC is looking expand the rights that (minority) shareholders, creditors, and employees have vis a vis the company and its majority shareholder or actual controller.

On 12 April, the Supreme People’s Court issued its draft Company Law interpretation for public comment, (linked here, with part of a bilingual version found here.  WestlawChina has a translation, available to subscribers).

Comments should be sent to the addresses specified in the notice: by email to: gsfjss_yang@163.com or by mail/courier to Judge Yang Ting, #2 Civil Division, at the SPC.

The deadline for public comments is 13 May.  Issuing the draft for public comment required the approval of the SPC leadership (the judicial committee), according to SPC regulations.

Many foreign investors take minority stakes in Chinese companies (or lend to Chinese companies) and find, to their sorrow, that the majority shareholder has abused his position and the minority shareholder or creditor.  The files of law firms, accounting firms, arbitration organizations, and Chinese courts are filled with these cases.

To the cognoscenti, this judicial interpretation reads as a guide to (combatting) the well-known strategies of unscrupulous majority shareholders, which include: fraudulent board or shareholder resolutions; board/shareholder resolutions adopted without the necessary quorum; board/shareholder resolutions approving related party transactions that harm creditors; blocking minority shareholder access to company books and records.

All entities with investments in China are affected by this provisions in this draft judicial interpretation.  The International Finance Corporation, Temasek, Kuwaiti Investment Authority and others should have their lawyers review and provide comments on its provisions.  The law committees of the foreign chambers of commerce in China and Hong Kong (Amcham, Eurocham, Auscham, SingCham, etc.) and the lawyers for the PE/VC communities (not to mention the banks) should consider submitting comments, as well as those interested in Chinese corporate governance.  Its provisions apply to both private (limited liability) and public companies (ones limited by shares), although some provisions only apply to private companies.

The issues in the draft interpretation, highlighted below, reflect the issues that have arisen in litigation in the lower courts on the rights of shareholders, particularly minority shareholders, particularly since the Company Law was amended at the end of 2013. Many of its provisions will be applicable to arbitration proceedings involving Chinese companies.

There has been an increase in litigation among shareholders and litigation between shareholders and companies and that is likely reflected in the statistics of arbitration organizations hearing disputes involving Chinese companies.

Thus far, I have seen one law firm analyze the draft, and I will update this blogpost with links to other analysis as I encounter them,  such as this one by the Han Kun law firm. A quick guide to some of the issues highlighted in the draft follows below.

Validity of decision of a resolution/decision of a board of directors/shareholders meeting/shareholders general meeting

These issues are addressed in the first 12 articles of the draft, putting some meat on the bare bones  of the Company Law, and giving minority shareholders, creditors, and employees greater rights.

Comments

Under this draft, shareholders, directors, supervisors, or senior management, creditors, and employees with a direct interest in the matter may file a challenge to the validity of a resolution under Article 22(1) of the Company Law, which provides that the contents of a resolution of one of those meetings are be invalid if they are in violation of laws or administrative regulations.

As to the grounds for invalidation, the draft specifically mentions: a shareholder abusing his power as a shareholder through a resolution that harms the interests of the company or other shareholders and decisions that excessively (过度) distributes profits or improper related party transactions that harm the interests of creditors. The draft also enables parties to apply for an order to stop the implementation of the invalid resolution.

Shareholder’s right to know

The second section of the draft interpretation  defines further and provides procedures for enforcing a shareholder’s right to know under Article 33 (for private companies) and 97 (for companies limited by shares). It is not unusual for a company to block minority shareholder access to company books and financial records, particularly when there has been a falling out between shareholders.

Under Article 33, a company shareholder can inspect and duplicate the company’s articles of association, the minutes of the shareholders’ meetings, the resolutions of the board of directors, the resolutions of the board of supervisors, and the financial and accounting reports of the company.  Under Article 97, the rights of shareholder in a listed company are more limited. Under the draft, a shareholder will be able to designate an agent to review the company records, particularly important for financial and accounting records.  The exercise of the right to know is often the precondition for being able to file suit under the first section.

Enforcing the right to have profits distributed

Section three of the draft sets out three articles setting out procedures by which a shareholder can enforce his right to have profits distributed.

Enforcing rights of first refusal

Section four of the draft addresses the right of first refusal–the priority right that existing shareholders have to purchase the shareholding of a party intending to transfer all or part of his shareholding to a third party.  Anyone involved in corporate practice in China will have encountered situations in which the selling shareholder engages in various types of strategies (generally misleading the other shareholders) to avoid selling to an existing one.

The draft defines “under the same conditions” as used in Article 71 of the Company Law as being holistic–the price, payment method, timeline for payment, and other factors. The draft also sets out the content of the notice to other shareholders, and most importantly, spells out situations in which a contract transferring shareholding to a third party can be invalidated, which include failing to inform the other shareholders (and other legal requirements) and changing (i.e. reducing) the conditions of sale to the third party after the existing shareholders have waived their right.  The author of the article mentioned above mentions that the draft does not deal with indirect structures, designed to prevent the existing shareholder from exercising his rights, as illustrated by the Fosun/Shanghai Soho dispute.

Derivative litigation

The last five articles of the draft address the mechanics of derivative litigation, including the type of company approval required for the litigation to be settled (mediated), as well as the important issue of the plaintiffs claiming reasonable lawyers, notaries, assessors, and other related fees. The draft permits what is known as “double derivative” litigation–the pursuit of a claim on behalf of a wholly owned subsidiary, a concept found in Delaware and English law. This recent article reviews recent Chinese cases on double derivative litigation, including one from the SPC, and quotes from the American Law Institute’s book Corporate Governance: Analysis and Recommendations.

Questions?

Those with further questions about providing comments on this draft may either use the comment function on this blog or email me at: supremepeoplescourtmonitor.com.

 

China’s international maritime judicial center

20160313104344_51387I recently published an article in The Diplomat entitled “China’s Maritime Courts: Defenders of ‘Judicial Sovereignty,” focusing on what Supreme People’s Court President Zhou Qiang meant when he mentioned that China would establish an international maritime judicial center (国际海事司法中心).  Many thanks to Professor Vivienne Bath for her research on parallel proceedings and choice of court issues involving China, as well as several others who provided their insights.

Data from the Supreme People’s Court on real estate disputes

Screen Shot 2016-03-26 at 3.46.14 PM
Pie chart of real estate investment disputes

Yu Yongding, Academician of the Chinese Academy of Sciences, writing in early March, indirectly predicts a continued growth in real estate disputes.

Clearly, China has gone too far in real estate development… By the end of 2015, the unsold house floor space for the country as a whole was 700 million square meters… Facing a double-digit growth in inventory, naturally, real estate developers cut their investment deeply. At the moment, the growth rate of real estate investment has dropped to almost zero. Without stretching the imagination, one can be sure that in 2016 growth of real estate investment will enter into negative territory.

Because the economics on which the participants in real estate development deals has changed greatly, that has meant a major increase in real estate disputes in 2015.

In 2016, as an earlier blogpost flagged, the Supreme People’s Court (SPC) is monitoring real estate disputes closely, because of their link with the government’s economic policy, social stability, and links with other parts of the economy. As Yu wrote, “real estate investment accounts for a fourth of the total investment. For a long period of time, real estate has been the most profitable area of investment in China.”

As set out in the earlier blogpost, in 2015, the SPC leadership identified the following problems in real estate development cases:

  • developers suing to invalidate grant contracts (under which they purchase land for development) and seek the return of the land grant fees (upon which local governments depend);
  • Developers who are short of funds and unable to hand over properties on time;
  • Declines in property prices causing “mass incidents.”
  • Cases involving real estate development and private lending, including illegal fundraising;
  • Many cases involving unpaid migrant construction workers.

According to the “big data” that the SPC recently released, in 2015, the number of cases in all categories related to real estate development rose sharply:

  • newly accepted grant contract disputes, 1368, up almost 21%.  A quick search of the SPC’s case database reveals that some of these cases have been heard in the first instance in provincial higher people’s courts and on appeal in the SPC, because of the large amounts in disputes.
  • disputes involving the sale (by developers) of real estate, 172,372 cases, up 42.29%.  Cases are up substantially in provincial cities, such as Liuzhou, Guangxi province and Zhaoqing, Guangdong, where the number of cases in the first half of 2015 were almost as much as the total for the year before.  Analysis by Zhaoqing judges of the cases revealed a laundry list of problems, such as poor government oversight of developers (because local government is desperate for investment); developers pre-selling real estate development projects although their rights to the land are in dispute; poor quality building,  misleading sales advertising, and cases involving large numbers of litigants.
  • joint venture real estate development cases, 1946, up 20%.  These refer to domestic joint venture cases, when one company provides the funding and the other the land.  Some cases involve deals between state-owned companies from different provinces, with the out of town party often trying to move the case to a more favorable venue ;
  • disputes involving compensation for demolished housing, 24,871 cases, by 33% (despite legal obstacles to bringing these cases) .(For those who understand Chinese, the Xuzhou (Jiangsu) courts have posted this video of proceedings in one such case).
  • Other types of real estate development cases, 33,605, up by 49%.

These cases (and related “mass incidents”) may be expected to rise in 2016.  Litigators with real estate expertise can be expected to be very busy.

Related to this, the SPC also expects an increase in real estate development companies going into bankruptcy.  It is for that reason that this month, one of the SPC journals has published an article by two Jiangsu High Court judges on priority in bankruptcy of real estate development companies.

 

Big data from the Supreme People’s Court on bad debt

The focus these days is on the amount of debt in the Chinese financial system.  Few economists are looking at the data on bad debt from the court system.  The data includes numbers on private lending, bank and other financial institution lending, and credit card debt.

 

Screen Shot 2016-03-24 at 9.11.32 PMThe data on lending disputes is partially useful, because it sets out numbers and percentage increases, but does not set out total amounts in disputes.  The pie chart above sets out data on different types of lending and finance sector disputes.

Private lending

This category encompasses a range of non-financial lending, from simple notes between individuals to P2P lending. Zhou Qiang’s report stated that  1,420,000 private lending disputes were resolved in 2015, with total amounts in dispute of 8,207,500,000,000 RMB (1,259,620,865.48 US Dollars.  This latest report states 1,536,681 new private lending cases were accepted, up 41.48%, but does not set out the amounts involved.

The total amounts in dispute are likely greater–greater work is required to tease out the details, as to how much of it is attributable to P2P lending, and other forms of business-related lending. Recent studies by local courts reiterate that these cases often involve fuzzy lines between companies and their owners, multiple guarantees or quasi-guarantees.

Bad debt cases involving financial institutions

Financial institution call loans: 9873, up 10.8%, inter-company loans: 12278 cases, up 3.87%, other types of financial loans (loans by financial institutions): 802,738, up 24%. Finance leasing disputes: 18,503 cases, up 61%, credit card disputes: 169,045, up 74%, insurance, guarantee, pawn shop lending disputes, up 15% and more.

It is likely that the SPC has more data about specific types of disputes in the finance sector, such as wealth management products, but this report did not set out that level of detail.

Using the SPC’s and other databases, further information can be obtained on the different type of loans categorized above, including security for these loans, amounts, geographies, and reasons for default.

 

 

Bulking up the Chinese maritime courts

December, 2015 Maritime courts conference
December, 2015 Maritime courts conference

The South China Sea continues to be in the news. But one of the many unnoticed developments related to the Supreme People’s Court (SPC) and the Chinese seas is the recent “bulking up” of the Chinese maritime courts.

The Chinese maritime courts, established 30 years ago, are said to be the busiest in the Asia Pacific region, and hear cases arising in Chinese waters, coastal and inland. In 2015, the maritime courts heard about 31,000 cases, a 43% increase year on year, with cases involving foreign parties accounting for about 15%.

The “bulking up”  of the maritime courts has occurred through the following recent events:

  • establishment of a maritime court training campus and research base;
  • two conferences convened by the SPC in December, 2015  on reforms to the maritime courts; and
  • two February, 2016 judicial interpretations revamping the jurisdiction of the maritime courts.

These developments are responding to both international and domestic factors and link to earlier government/Party initiatives

This blogpost will highlight some of the international developments.

Party initiatives guiding the reform of the maritime courts

Reforming the maritime courts was foreshadowed in the 4th Plenum Decision, Supreme People’s Court 4th Five Year Plan for reforming the courts and more specifically in One Belt One Road Opinion:

From the 4th Plenum:

Adapt to the incessant deepening of opening up to the outside world, perfect foreign-oriented legal and regulatory systems, stimulate the construction of new structures for an open economy. Vigorously participate in the formulation of international norms, promote the handling of foreign-related economic and social affairs according to the law, strengthen our country’s discourse power and influence in international legal affairs, use legal methods to safeguard our country’s sovereignty, security and development interests.

From the court reform plan:

Reform the maritime case jurisdiction system. Further clean up the system for trial of maritime matters. Scientifically determine the scope of jurisdiction for maritime courts, establish working mechanisms better suited for maritime courts hearing of cases.

The One Belt One Road SPC Opinion highlighted some of the current reforms to the maritime courts, in some detail.

SPC new training center

December’s national maritime courts conference was held in Qingdao, where the maritime court training campus was established.  SPC President Zhou Qiang, who presided over the conference, described its purpose as:

to implement the decisions and arrangements of the CPC Central Committee, to accelerate the trial of maritime personnel training, promote maritime judicial theory and innovative practice.  It is an important measure for promoting the development of maritime trial work and advances international maritime justice.

A senior staff member of the Central Political Legal Committee and officials of Ministry of Foreign Affairs, State Ocean Administration, and other government agencies also attended the conference.

New regulations on jurisdiction of maritime courts

As mentioned above, in February, 2016, two regulations on the jurisdiction of the maritime courts were issued by the SPC.  Those regulations had been previously highlighted in several conferences and SPC documents, including the November, 2014 4th National Work Conference on Foreign-Related Commercial and Maritime Adjudication, OBOR Opinion, and December, 2015 Maritime Courts conference.  These regulations had been issued for less than two weeks in November for public comment, making it difficult if not impossible for interested foreign parties to comment.

One of the new regulations relates to the geographical jurisdiction of several maritime courts, principles for determining jurisdiction in administrative cases and objections to jurisdiction.  The other expands the scope of cases that can be heard by the maritime courts, setting out over 112 categories of cases that can be brought. In the section on ocean and sea navigable waters exploitation and environmental protection related disputes, ocean and sea navigable waters construction disputes are included, such as underwater dredging construction, land reclamation and ..artificial islands.

International maritime justice

Zhou Qiang had the following to say about the goals of reforming the maritime courts to improve their international  prestige.

  • Make the maritime courts  internationally influential.  We have already established ourselves as the Asia Pacific area maritime judicial center (确立了亚太地区海事司法中心的地位).  (A corollary to this (derived from conference presentations) appears to be a push to move the locus of maritime dispute resolution from London and other centers in Europe to China, where Chinese parties will encounter a more familiar dispute resolution system);
  • Increase China’s influence over the development of international maritime rules.  Improve China’s contribution to international maritime law, effectively safeguarding national sovereignty, security and development interests. (This is directly related to the 4th Plenum Decision.)
  • Strengthen the sense of national sovereignty (要强化国家主权意识), exercise jurisdiction over all types of maritime development and utilization of marine waters within the jurisdiction of the country.  This refers to all the marine waters China claims in the South China Sea and elsewhere, according to a Chinese maritime law expert.

Commercial issues

From comments by (foreign) maritime law practitioners, it appears that major European and American shipping companies have concerns about the Chinese maritime courts.  Concerns include:

  • Chinese courts, particularly the maritime courts, have repeatedly refused to enforce choice of court clauses when the chosen forum has no actual connection with the dispute.    Chinese maritime courts rely on the principle in Article 34 of the Civil Procedure Law that the choice of court selected by the parties must have a connection to the matter (although China’s choice of law legislation does not require a choice of law to have a connection) to disregard choice of courts clauses in bills of lading or other documentation, even if  proceedings have begun in other jurisdictions. This often occurs in cases involving bills of lading.
  • Related to this is that the Chinese maritime courts are sometimes the site of parallel proceedings, when there may be proceedings elsewhere in the world relating to the same dispute.  Some of these cases were described in a talk at the University of Hong Kong by Professor Vivienne Bath of the University of Sydney and will be incorporated into a forthcoming article.

The larger issue, of course, is that while the Chinese maritime courts now include some very highly trained and experienced judges, the emphasis on Chinese national interests and national sovereignty leads non-Chinese and private enterprise litigants to question whether their dispute will be considered fairly.

 

 

 

 

First quarter 2015 bankruptcy cases in the Chinese courts

Continuing my series on bankruptcy law, this blogpost gives a quick report on 2015 first quarter bankruptcy cases in the Chinese courts, drawn from this report (including the charts used).

Bankruptcy cases accepted, by province
Bankruptcy cases accepted, by province

During that period, the Chinese courts accepted 264 bankruptcy cases.  Jiangsu, Zhejiang, and Guangdong had the top number of cases, followed by Shanxi, Anhui, and Hunan.  The top bar is cases is the rest of the country. d5015987-bb7f-4ee4-812a-e711a3264557

The piechart sets out the percentage distribution of cases by province (the largest percentage is from the rest of the country).

A listing of the courts that have accepted the most bankruptcy cases bears out earlier analysis on this blog about the Shenzhen courts (Shenzhen is the court that has accepted the most bankruptcy cases in the country, with Zhangjiagang (Jiangsu Province) in second place.

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As for the types of cases, the piechart below shows that most cases (about 2/3s) were bankruptcy liquidation cases, followed by reorganization (about 1/3), with very few settlement cases.  This article explains the three different types of cases.

d5015987-bb7f-4ee4-812a-e711a3264557On the geographical distribution of the liquidation cases.the piechat above shows that most arose in Jiangsu Province (about 23%), with Guangdong, Zhejiang, Shanxi, and Anhui Provinces following in descending order.  The 40% is from the rest of the country. Several cases involve multi-tiered, overlapping layers of complex entities (as elsewhere in the world), leading Chinese courts to consolidate the bankruptcy cases of several related companies (this Harvard Law School article gives a US bankruptcy perspective on consolidation).3be5b38d-70a0-4ebd-bdae-3472f9de09ae

On the geographical distribution of the reorganization cases, the piechart above shows that greatest proportion of reorganization cases were in Zhejiang (25%) (the site of at least one pilot court for bankruptcy cases), followed by Anhui, Jiangsu, Shandong/Shanxi) (the 30% is for the rest of the country).

As mentioned previously, the Supreme People’s Court expects to see an upturn in bankruptcy cases, and I would expect to see initiatives in transferring cases from enforcement to bankruptcy (an outstanding issue for the courts) and proposed solutions to achieve more reorganization and settlement cases. These are likely to happen because (as mentioned previously) the Chinese government has committed to reducing the number of zombie enterprises.  Early this spring, a conference will be held in China on the trial of bankruptcy cases, where these issues are likely to be discussed. If the organizers (and funding) permit, I will attend.

 

Accessing Chinese legal developments through Wechat (updated)

logoWechat, as most people with an interest in China know, has become the preferred form of social media in China.  The legal community in China has taken to it too.

Some are official accounts of government entities, including the courts and others are public accounts (公众账号) established by companies, law firms, individuals, and other organizations. Ir  Each has its benefits for the user located outside of China.

To access these public accounts, it does not matter where in the world you are located, but you need a smart phone to install the Wechat app. The accounts can be accessed through “search official accounts” or “Add contacts” and typing in either the Wechat ID or the name of the account. The accounts can also be accessed through computer or table as well, by searching for the account in question.

The official government accounts enable the user to keep current on the issues and latest government position in that area of law–new policy, new legislation, and new reforms.  The Supreme People’s Court, for example, has one, as does the Supreme People’s Procuratorate, as well as their local counterparts.

Another category is the less official public accounts.   Some are affiliated with official organizations, while others are not, while others are in a grey area. The writing tends to be aimed at the professional, with less bureaucratic language.   Some accounts are aimed at practicing lawyers, more focused on civil and commercial law than criminal law or administrative law, but both can be found. Some accounts publish writings by the account holder, while others accept articles submitted by followers.  One very popular type of article is one that reviews the law and cases in a particular area of law.

Some of the legal public accounts that I follow (or are highly recommended by those that I know) are listed below.  The list has now updated with further information provided by a 31 January article in Empire Lawyers and Lawread on the top 10 public accounts. Please use the comment function (or email me) to suggest additional accounts.

  • Arbitration:  Wechat ID: cnarb1, account of Lin Yifei, mentioned in an earlier blogpost.  I highly recommend it to both practitioners and others interested in arbitration.
  • Labor law:Wechat ID: laodongfaku (劳动法库) (with over 200,000 followers (this is mentioned in Empirelawyers top 10; Wechat ID: ldfview (子非鱼说劳动法);
  • Civil law 海坛特哥 (haitanlegal), account of Chen Te, formerly of the Beijing Higher People’s Court, now a lawyer (高衫legal) [his earlier posts focused on medical law], Wechat ID: gaoshanlegal;  审判研究, Wechat ID: spyjweixin; 法客帝国, Wechat ID: Empirelawyers; 审判研究, Wechat ID: msspck.
  • Criminal law: 辩护人 (bianhuren1993); 刑事实务, Wechat ID: xingshishiwu, with over 200,00 followers; 刑事审判参考 Wechat ID: criminailaw.
  • Judiciary: There are many, among them are: 法影斑斓 , account of He Fan, judge in the judicial reform office of the Supreme People’s Court, Wechat ID: funnylaw1978 and JunnyLaw (JunnyLaw1977) the newly established account of Jiang Qiang, a judge in the #1 Civil Division of the Supreme People’s Court, so far, articles focusing on civil law issues.
  • Civil litigation, 天同诉讼圈, Wechat ID: tiantongsusong (in the top 10), established by Tian Tong & Partners), with over 250,000 followers;
  • International law: Wechat ID: ciil 2015 国际法促进中心
  • IP law–知识产权那点事, Wechat ID: IPR888888.  The posting of 30 January, for example, includes the Supreme People’s Court judgment 11 January in its retrial of the Castel wine trademark infringement case and an article on indirect infringements of copyright on the Internet.
  • Aggregators/General–智和法律新媒体, Wechat ID: zhihedongfang; 法律博客, Wechat ID: falvboke,  法律读品, Wechat ID: lawread, 尚格法律人, wechat ID: falvren888 (followed by at least 130,000 legal professionals). 法律读库 Wechat ID: lawreaders, followed by 500,000 (in top 10); 法律讲堂, Wechat ID: yunlvshi, established by a partner with the Yingke Law Firm (also listed among the top 10).

This linked article written by Chen Te discusses how legal professionals can market themselves through a public account as well as some of the issues of having a public account.

Accessing Chinese legal developments through Wechat

logoWechat, as most people with an interest in China know, has become the preferred form of social media in China.  The legal community in China has taken to it too.  Some are official accounts of government entities, including the courts and others are public accounts (公众账号) established by companies, law firms, individuals, and other organizations.  Each has its benefits for the user located outside of China.

To access these public accounts, it does not matter where in the world you are located, but you need a smart phone to install the Wechat app. The accounts can be accessed through “search official accounts” or “Add contacts” and typing in either the Wechat ID or the name of the account. The accounts can also be accessed through computer or table as well, by searching for the account in question.

The official government accounts enable the user to keep current on the issues and latest government position in that area of law–new policy, new legislation, and new reforms.  The Supreme People’s Court, for example, has one, as does the Supreme People’s Procuratorate, as well as their local counterparts.

Another category is the less official public accounts.   Some are affiliated with official organizations, while others are not, while others are in a grey area. The writing tends to be aimed at the professional, with less bureaucratic language .   Some accounts are aimed at practicing lawyers, more focused on civil and commercial law than criminal law or administrative law, but both can be found. Some accounts publish writings by the account holder, while others accept articles submitted by followers.  One very popular type of article is one that reviews the law and cases in a particular area of law.

Some of the legal public accounts that I follow (or are highly recommended by those that I know) are listed below.  Please use the comment function (or email me) to suggest additional accounts.

  • Arbitration:  Wechat ID: cnarb1, account of Lin Yifei, mentioned in an earlier blogpost.  I highly recommend it to both practitioners and others interested in arbitration.
  • Labor law:Wechat ID: laodongfaku (劳动法库) (with over 200,000 followers; Wechat ID: ldfview (子非鱼说劳动法);
  • Civil law 海坛特哥 (haitanlegal), account of Chen Te, formerly of the Beijing Higher People’s Court, now a lawyer (高衫legal) [his earlier posts focused on medical law], Wechat ID: gaoshanlegal;  审判研究, Wechat ID: spyjweixin; 法客帝国, Wechat ID: Empirelawyers; 审判研究, Wechat ID: msspck.
  • Criminal law: 辩护人 (bianhuren1993); 刑事实务, Wechat ID: xingshishiwu; 刑事审判参考 Wechat ID: criminailaw.
  • Judiciary: There are many, among them are: 法影斑斓 , account of He Fan, judge in the judicial reform office of the Supreme People’s Court, Wechat ID: funnylaw1978 and JunnyLaw (JunnyLaw1977) the newly established account of Jiang Qiang, a judge in the #1 Civil Division of the Supreme People’s Court, so far, articles focusing on civil law issues.
  • International law: Wechat ID: ciil 2015 国际法促进中心
  • IP law–知识产权那点事, Wechat ID: IPR888888.  The posting of 30 January, for example, includes the Supreme People’s Court judgment 11 January in its retrial of the Castel wine trademark infringement case and an article on indirect infringements of copyright on the Internet.
  • Aggregators–智和法律新媒体, Wechat ID: zhihedongfang; 法律博客, Wechat ID: falvboke,  法律读品, Wechat ID: lawread

This linked article written by Chen Te discusses how legal professionals can market themselves through a public account as well as some of the issues of having a public account.

Shenzhen leads the way in bankruptcy law reforms

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Shenzhen’s bankruptcy information platform

This very brief blogpost is reporting on bankruptcy law developments in Shenzhen.  The Shenzhen courts are often used as a venue for piloting reforms, and bankruptcy law is no different.  It is likely that the Supreme People’s Court (SPC) is aware of this.

The Shenzhen Intermediate Court held a press conference on 21 January  to announce that they had established a bankruptcy information platform (linked here) with information case guidance, filing guidance, guidance on procedures, bankruptcy case announcements, bankruptcy judgements, etc.  The Shenzhen court also released some recent statistics on their caseload.  In 2015, the Shenzhen intermediate court accepted 131 cases, up 105% from the year before, tried 283 cases, and resolved 82 cases (up 26% from the year before). On the timing for cases to be resolved, as mentioned in a previous blogpost, bankruptcy cases tend to take a long time to be closed in the Chinese courts.

The bankruptcy platform is likely to be a model for other courts around China and fits nicely with the other “informatization” initiatives of the SPC.  Having a single platform should make it easier for bankruptcy practitioners (as well as buyers of distressed assets).  For those of outside of the Chinese court system seeking to understand what is happening, it will provide more information for us to consider.
The cases in Shenzhen accounted for 40% of the total bankruptcy caseload in Guangdong.  Although national statistics for bankruptcy cases in 2015 have not yet been released, when compared with 2014 (and presuming China had more cases bankruptcy in 2015), Shenzhen accounts for a significant proportion of bankruptcy cases. That is likely not a sign of weaker companies in Shenzhen, but that the Shenzhen government is more willing to see companies go through bankruptcy procedure.

 

Bankruptcy: What to expect in 2016 from the Chinese civil & commercial courts (II)

imgres-1As readers of this blog know, in recent years, the Chinese courts have had very few bankruptcy cases. Judges of the Supreme People’s Court (SPC) predict that will change in 2016.  Why (and where) do they say so? What guidance is the SPC giving Chinese bankruptcy judges? What else do we know about bankruptcy cases?

Why more bankruptcy cases?

At the 8th national conference for civil and commercial judges (discussed in an earlier blogpost), Judge Yang Linping of the #2 Civil Division revealed that the SPC expects an upward trend in bankruptcy cases because the Economic Work Conference at the end of 2015 called for quickening the clearance and exit of “zombie companies” through transfer of ownership and bankruptcy.

What is the guidance from the SPC?

Among the guidance from Judge Yang:

  • Make it easier for companies to go into bankruptcy proceedings, while not using the new filing system.  Shenzhen, one of the local courts that has heard a significant proportion of bankruptcy cases, issued local court guidance in May, 2015 on the filing of bankruptcy cases that the SPC is likely considering.
  • Distinguish real bankruptcies from fraudulent ones, in which the bankrupt enterprise “maliciously” seeks to defeat its creditors;
  • Courts hearing bankruptcy cases should monitor bankruptcy administrators to be sure they are recovering assets;
  • Review the reasons for the bankruptcy to see whether criminal conduct was involved in the collapse of the company;
  • Higher level court should monitor the way lower level courts handle bankruptcy cases;
  • Use bankruptcy reorganization procedures where appropriate, particularly for larger scale companies that have operational value.

It would not be surprising to see further guidance from the SPC as the year progresses.

What else?

How to deal with the collapse of real estate companies (highlighted in a previous blogpost) is likely high on the list of difficult issues for Judge Yang and her colleagues to consider.  The Zhejiang courts have already issued detailed guidance on the bankruptcy of real estate companies.  A conference on real estate companies and bankruptcy was held in Zhejiang, just after the 8th civil and commercial judges conference, attended by a senior SPC bankruptcy judge, bringing together bankruptcy judges, practitioners, academics, accountants, and financiers. The effect on migrant labor construction workers was likely on everyone’s minds as well, as bankruptcy cases must be handled with an eye to maintaining social stability.

The official media has predicted a wave of shipping company bankruptcies in 2016.Several Chinese shipping companies went into bankruptcy in 2015.

We are likely to see more bankruptcies among Chinese P2P lending platforms. According to media reports late in 2015, 270 failed in the last year.

 

 

 

 

What to expect from Chinese civil & commercial courts in 2016 (I)

top-happy-new-year-2016-wallpaperIn late December, the Supreme People’s Court (SPC) held its 8th conference for civil and commercial judges, gathering together senior court leaders from around the country and from both civilian and military courts responsible for a broad range of civil and commercial issues. Speeches of two senior SPC judges responsible for civil and commercial matters, as well as a draft conference summary have been circulating among Chinese legal professionals.  What is the relevance of all of this to the world outside of the Chinese courts, particularly to the world outside of China?

It is relevant for several reasons:

  • The court conference illustrates the role of the SPC in the Chinese political legal system and its relationship with other institutions;
  • As in other legal systems, the Chinese courts are an individual or company’s  last resort for resolving disputes;
  • Those disputes highlight major issues in the Chinese economy and society.  The slowdown in the Chinese economy is already affecting the rest of the world, and the difficult issues for the courts signal where economic problems are.  Social issues have a more indirect impact on the outside world, but still affect foreign businesses and institutions.

The phenomenon of the court conference (and conference summary)

As this blog has highlighted earlier, the Chinese government regularly organizes conferences to ensure that subordinate entities are implementing the latest central policy on the matter as well as to harmonize local practice.  This is true of the courts as well as the food safety authorities.

Because the SPC is one of several central political legal institutions, the speakers included Meng Jianzhu, head of the Central Political Legal Committee, and participants included representatives from the Central Political Legal Committee, the Legal Work Commission of the National People’s Congress, the Legislative Affairs Office of the State Council, and other central legal institutions.

The conference summary, now circulating in draft form, is a type of SPC official document (see the SPC’s regulations on the subject), classified as a “normative document” and often address new issues or areas of law in which the law is not settled.  Under SPC rules, it can not be cited as the basis  of a court judgment but guides how lower courts consider the issue.

As to why the SPC organized the conference, the vast majority of Chinese court cases are civil and commercial. At the conference it was revealed that 80% of cases resolved by the Chinese courts since 2008 are civil and commercial cases. For that reason, if the goal of the SPC is to make every person feel fairness and justice in every case (under Party leadership), the focus must be on doing a good job in hearing civil disputes.

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Judge Cheng Xinwen interviewed in 2014

What are the issues facing the Chinese courts?

Judge Cheng Xinwen, the head of the #1 Civil Division spoke about the issues civil  court judges need to monitor in 2016 (some of which have been mentioned in earlier blogposts) and the current official thinking on them (set out in the conference summary):

  1. Real estate, property and construction;
  2. Family;
  3. Torts;
  4. Labor;
  5. Agriculture;
  6.  Consumer protection;
  7. Challenges to enforcement action;
  8. Private lending.

This blogpost looks at some of the issues relating to real estate, property, and construction cases.

Real estate, property and construction cases

Real estate cases account for a substantial part of the caseload of the Chinese courts.  Trying them properly, according to the SPC leadership, is linked to implementing the government’s macro-economic policies. Cases are on the increase, particularly in third and four tier cities.  The market has switched from a seller’s to a buyer’s market in some second and third tier cities:  Some of the problems include:

  • developers suing to invalidate grant contracts (under which they purchase land for development) and seek the return of the land grant fees (upon which local governments depend);
  • Developers who are short of funds and are unable to hand over properties on time;
  •  Declines in property prices causing “mass incidents.” Local courts are directed to liaise with local Party and government authorities, and take steps to prevent chain reactions.  This 2014 article mentions incidents in Taizhou, Zhejiang province, a province where many cities have seen a deflating property market;
  • Many cases involve both real property and private lending, and include developers illegally fundraising, mortgaging or selling the same property several times;
  •  Property registration, ownership in common, and bona fide purchases, are difficult issues for the courts, and the SPC will issue further guidance in the form of a judicial opinion on these soon.

Construction cases account for a relatively small number of cases (about 100,000 annually), but they tend to be complex and involve large amounts of money. Issues with construction cases indicate big problems in the industry because of funding problems, causing quality problems in construction, many unpaid migrant construction workers and an increasing number of disputes. Among the problems:

  • construction contracts that should have been let out for bidding that weren’t;
  • construction contracts illegally subcontracted;
  • construction contracts illegally subdivided;
  • contracts in which a contract party should have had a construction qualification or planning permit.
  • Contract parties to these invalid contracts that seek to minimize their payouts under these contracts and seek to avoid the payment clauses (but the SPC states that those should be respected);
  • Unless a subcontractor’s migrant construction workers remain unpaid, courts shouldn’t disturb liquidated damage clauses to expand a project owner’s liability. With unpaid laborers, the project owner’s lability could be expanded to cover the amounts owed to the actual unpaid workers.

Courts are directed to balance individual and societal interests, to uphold social public interests and an orderly construction market.

At the conference, the SPC leadership promoted six slogans (i.e.principles) of:

  • protection of  property rights;
  • respect for freedom of contract;
  • upholding equal protection;
  • upholding the unity of rights and duties;
  • maintaining honesty and keeping promises;
  • promoting procedural and substantive justice;

Litigants of all types, domestic and foreign, corporate and individual will be able to come to their own conclusions about how well the Chinese court system delivers on these broad principles.

 

 

Year end bonus from the Supreme People’s Court

images-1As highlighted in the last blogpost, the Supreme People’s Court (SPC) is issuing all sorts of documents in the rush towards year end, far outpacing the time available to the Supreme People’s Court Monitor to analyze them.   Some of the recent developments that merit closer scrutiny:

  • more model/typical family law cases (incorporating the ones highlighted in an earlier blogpost) and with many more involving domestic violence and cohabitation issues;
  • 19 model/typical contract cases, including several private lending cases, real property cases, etc.
  • 14 model/typical food and drug crime cases, including one involving a supermarket (I had written this on food safety raids earlier this year;
  • Five model/typical cases of refusing to implement court judgments/rulings;
  • Two model/typical cases on non-payment of wages (this is an issue of high priority for the government;
  • Ten model/typical fraud cases;
  • Updated sentencing guidelines for a broad range of criminal cases, including rape, picking quarrels, and fraud;
  • Guidance from the head of the #2 criminal division on principles for applying the sections of the recent amendment to the Criminal Law on bribery and corruption (in which is likely to be incorporated into a future judicial interpretation);
  • An authoritative article by the SPC’s research office on the new terrorism crimes set out in the recent amendment to the Criminal Law;
  • approval by the SPC judicial committee (in principle) of the first judicial interpretation of the Property Law, which means most provisions are finalized, but the final draft is not set.  A recent draft discussed by the Civil Law Society was published recently. Several provisions address the issue of a “bonafide purchaser.”

 

Update on case filing reform and other challenges for Chinese courts and judges

Case filing hall in a Jingdezhen court
Case filing hall in a Jingdezhen court

In late November, the Supreme People’s Court (SPC) held a press conference on case filing (docketing) reforms to announce a 32% increase in civil and administrative case filings, year on year, putting a positive spin on what is a highly stressful situation for frontline judges, but a generally positive development for litigants and their lawyers. There are many stressful factors for Chinese judges and the Chinese courts, leading many judges to leave or contemplate suicide, and others to vote with their feet.  This blogpost will look at some of the recent developments:

  • Large number of cases;
  • Increasing fraudulent litigation;
  • Dysfunctional performance indicators that refuse to die.

The three issues are interrelated.

Case filing (docketing) reforms

On the case filing reforms, through the end of September, civil cases are up almost 23%, and administrative cases up 76%, while private prosecutions of criminal cases are up 60%,The most litigious provinces are ones with highly developed economies: Jiangsu (608,000 cases), Zhejiang, Shandong, Guangdong (558,000 cases).  The Supreme People’s Court caseload was up as well, with 6852 cases accepted through September, up 58%, estimated to reach 15,000 cases by year end.

Fraudulent litigation

Fraud of all sorts is a growth industry in China, especially with the worsening economy. Creative thinkers have come up with ways to use the court system to defeat or at least delay or avoid creditors.  In recent years, the Chinese courts have been faced with an increasing amount of fraudulent litigation, now criminalized on one of the unnoticed provisions in the 9th Amendment to the Chinese Criminal Law (new Article 307-1).  However, the law does not set out a definition, although some provincial court have issued guidance.  Usual factors include litigation based on: fabricated facts, fabricated arbitration award, or notarized documents, or collusion between the parties  or third party to use fabricated facts, false evidence, false documents, destruction of evidence, provide false documents, expert opinion and other means to avoid debt or improperly gain assets.

With the reform to the case filing system (described in this earlier blogpost), fraudulent litigation on the increase. For this reason, the SPC recently issued its first ruling on fraudulent litigation, imposing a penalty of 500,000 RMB on two Liaoning companies, to signal to lower court judges that they need to monitor case filings for indications of fraud.  Fraudulent litigation can be found in various types of cases, and in the maritime as well as local courts.

On fraudulent litigation in the maritime courts, an experienced maritime judge provided the following typical scenario: because the Chinese shipping industry is in a downturn (see these articles, for example), a ship owner who is unable to repay their debts (and finds that the size of the mortgage is more than the value of the ship) will conspire with their employees to bring a claim for unpaid wages, because under the Special Maritime Procedure Law, those claims take priority over the mortgage.  The employees and shipowner will split the proceeds from the claim, shortchanging the bank and other creditors.

According to Zhou Qiang’s report to the NPC, about 3400 cases of fraudulent litigation were discovered in 2014.  According to studies done by provincial courts in recent years,  104 cases were found in 2011-2012 in Jiangsu, and 940 in selected courts in Guangdong during 2001-2009.

With the case filing reforms and soft economy, these numbers are likely to rise. Readers (of Chinese) interested in diving further into this topic should read this article.

Dysfunctional  performance indicators

Writing in People’s Daily, Judge He Fan, head of one of the departments of the SPC’s Judicial Reform Office, highlighted that “some leading cadres” wanting to achieve year end “pretty data”  are still imposing unrealistic year end performance targets, forcing front line judges to work unreasonable hours (and also  diminishing case quality). These performance targets were abolished in 2014, as highlighted in this blog.

As for why Chinese judges are leaving in such numbers and why they are so unhappy, that will be the subject of another blogpost.

 

Brief report on bankruptcy litigation in the Chinese courts

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Declaration of bankruptcy meeting of Guangdong company

The soft Chinese economy means that an increasing number of Chinese companies are in financial difficulties.  But, according to the Supreme People’s Court, the number of bankruptcy cases have been decreasing rather than increasing, with over a thousand cases accepted nationally in 2014.  Earlier this fall, the All China Lawyers Association held a conference for its bankruptcy practitioners, to which were invited the head of  #2 Civil Division of the Supreme People’s Court, Judge Liu Min (principal author of the bankruptcy law judicial interpretation),  KPMG partner, Cao Chunye, SASAC officials, and others.  What more can be said about the decrease in cases, why the decrease in cases and what is the Court doing about it?

Some Statistics

According to a 2014 Court study by Ma Jian of the Court’s Research Office, from 2003-2012, the Chinese courts accepted about 40,500 bankruptcy cases, decreasing an average of 12.23% a year, only increasing in Henan and Tianjin, which Ningxia, Hunan, Hebei, and Qinghai decreasing at a rate of 20% a year or more. In almost 70% of cases, the debtor company applied for bankruptcy, with only 30% creditor initiated.  The Court analysis was that creditors didn’t have a clear picture of the business operations of their creditors, or still believed that the debtor would be able to repay, or believed that because asset recovery in bankruptcy was so little, they did not want to bother initiating bankruptcy. Practically all the companies in bankruptcy proceedings were domestic companies, with 55% state owned companies, 26% collectively owned. Almost half of the cases took a year or more to resolve.

Why?

Ma Jian set out the following factors:

  • In a Chinese bankruptcy, the judge has more of a societal function than legal.
  • Most companies misunderstand bankruptcy law;
  • Local government interference in the acceptance, and trial of bankruptcy cases, with local governments closing down companies through administrative means, leaving unresolved debts and workers who have not been resettled;
  • Many obstacles stand in the way of realizing assets: 1) many companies in financial trouble have old equipment that is not worth much on the market or no one appears at the auction; 2) many SOEs occupy allocated land (land given by the government for free), and when the government takes possession of the land, it is impossible to sell the buildings on the site; 3) some companies use collective land, so that only other collectively owned entities can purchase the buildings built on the land.
  • It is very difficult to recover bankruptcy assets.  The debts are generally very old, and often times the statute of limitations has expired; additionally it is often difficult to find company debtors;
  • Resettlement of workers, is the primary issue to be considered in a bankruptcy case, particularly with the social safety net in such a fragile situation (according to Ma Jian).
  • Additionally, reorganization is very difficult to do, with multiple government approvals, difficulties in obtaining creditor agreement, difficulties in changing a company’s line of business, etc.
  • KPMG partner Cao Chunye highlighted the unfavorable tax treatment of companies in bankruptcy restructuring;
  • As to why courts do not want to accept cases, Ren Yimin of the All China Lawyers Association Bankruptcy and Restructuring committee mentioned that a bankruptcy of private company may cause a chain of other companies to fail, and it is difficult to resolve a chain of linked cases.

Measures

Some of the many measures under consideration or being explored include:

  • Moving bankruptcy cases out of the local courts where the company is located, to centralize jurisdiction in certain courts;
  • Making it easier for creditors to switch from enforcement proceedings to bankruptcy;
  • Improving the system for bankruptcy administrators.;
  • Looking to have a fast track system for small cases;
  • Exploring better restructuring systems.
  • Looking to foreign law, particular US bankruptcy law, for concepts that could be used to improve the bankruptcy system.

(Those with a greater interest in this topic can review this law review article–in the current situation, this area of law deserves closer attention by concerned professionals than it is currently receiving.)

Result of the “3 nos policy” when Chinese companies arbitrate abroad

f6ac33117179fe35848072c3a7ed0c69With more and more Chinese companies doing business abroad or with overseas companies, more and more Chinese companies have agreed to arbitrate outside of China.  According to a recent blogpost in one of the best known Chinese arbitration blogs (written by Lin Yifei, formerly on the staff of the Shenzhen Court of International Arbitration), some Chinese companies adopt the “three nos policy” when a foreign party initiates arbitration proceedings abroad: no participation in the foreign arbitration proceedings, no cooperation with the foreign arbitration proceedings, and no enforcement of the foreign award.

The thinking is: foreign arbitration is troublesome, so it’s best to focus on making the offshore award worthless, or (alternatively) we’re going to lose the case anyway, so it just means an additional enforcement procedure.

Do the Chinese courts support this approach?

A ruling from the Suzhou Intermediate Court in 2014 in the case of Brambill Limited (Brambill) v. Zhangjiagang Huafeng Heavy-duty Equipment Manufacturing Co., Ltd (Zhangjiagang Huafeng) set out in the blogpost provides an answer. “Three nos” companies should expect that Chinese courts will enforce offshore arbitral awards.

In 2014, Brambill filed an enforcement action in the Suzhou Intermediate Court to enforce an ICC (Hong Kong) award, under the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the HKSAR  The dispute related to  a sales contract, in which Zhangjiagang Huafeng failed to make delivery.  In June, 2010, Brambill Limited filed a request for arbitration.  Although Zhangjiagang Huafeng was served with Brambill’s pleadings, informed of its right to file an answer, appoint an arbitrator, give views on the location and language of the arbitration, the Chinese company failed to respond. The case was heard in Hong Kong and arbitral tribunal members in the ICC case were: my former colleague Peter Thorp (chair), Professor Shen Sibao (Executive Director of the Shenzhen Court of International Arbitration and former Dean of the law school of the University of International Business in Beijing), and Mr. Hee Theng Fong.

In June, 2012, the tribunal issued its award, which was served on Zhangjiagang Huafeng.  The Chinese company did not apply to set aside the award within six months, but opposed enforcement on the grounds that the arbitration clause was unclear. The Suzhou court ruled that Zhangjiagang Huafeng should have raised the issue of the invalidity of the arbitration agreement during the arbitral proceedings or applied to set aside the ICC award in Hong Kong within six months of issuance. According to the Suzhou court, there were no public policy reasons to refuse enforcement of the ICC award, and so the Suzhou court ruled to enforce the award, and required the Chinese company should pay Brambill’s enforcement fees.

(In honor of Hong Kong’s Arbitration Week 2015)

Comments on cooperation between the US and China on judicial reform

One of the lesser known outcomes of Xi Jinping’s trip to the United States is the commitment by the United States government to work with China on judicial reform.

The official White House press release (mirrored in statements by the Chinese Ministry of Foreign Affairs) states:

the United States and China commit to conduct high-level and expert discussions commencing in early 2016 to provide a forum to support and exchange views on judicial reform and identify and evaluate the challenges and strategies in implementing the rule of law.  U.S. participants are to include leading members of the U.S. judiciary, U.S. government legal policy experts, and officials from the Departments of Commerce and Justice and the Office of the United States Trade Representative.  Chinese participants are to include officials from the Central Leading Group on Judicial Reform, leading members of the Chinese judiciary, and Chinese government legal policy experts.  This dialogue is to result in an improvement in the transparency and predictability of the business environment.  This dialogue does not replace, duplicate or weaken existing regular bilateral legal and human rights dialogues between the United States and China.

This statement deserves more attention from the legal community than it has received so far.  Some brief comments below:

  • It is good for China and the rest of the world for Chinese judicial reform to be the subject of inter-government dialogue aimed at positive results.  Whatever improvements eventually result from this dialogue will eventually benefit both Chinese and foreign litigants.
  • The Communist Party’s Central Leading Group on Judicial Reform is explicitly named as one of the participants from the Chinese side.  It approves major Chinese judicial reforms (the text of the 4th five year judicial reform plan evidences that), so it makes sense for it to have one or more representatives involved in future dialogue (although technically it is not a “judicial institution.”
  • It is likely to include leading members of the Supreme People’s Court, but is unclear what other institutions will be involved.  Do the legal policy experts of the Chinese government also include the State Council’s Legislative Affairs Office?
  • The question is what issues the dialogue will focus on.  It is clear that the intent is to focus on technical legal issues, but which ones?  Perhaps the Law Committees of Amcham China and Amcham Hong Kong can draft a list of issues for the US government agencies involved in the dialogue to consider.
  • Among the issues I would nominate would be those related to better integrating the Chinese courts with its counterpart institutions in the rest of the world.  The Supreme People’s Court One Belt One Road (OBOR) opinion (see my earlier blogpost) mentioned that China was looking to expand bilateral and multilateral mutual judicial assistance arrangements, for better delivery of judicial documents, obtaining evidence, and recognition and enforcement of foreign court judgments.  My fellow blogger, Mark Cohen, recently wrote about the issues relating to the problems of litigants in the US courts seeking evidence relating to Chinese counterfeiters. The number of cases in foreign courts involving Chinese commercial activity is likely to increase and better judicial assistance structures should be put in place.
  • Related to the previous issue would be improving the international standing and influence of the Chinese courts (as the OBOR opinion states is a goal) in a positive way, by being a more neutral forum for cross-border disputes.  Statements such as the one made by Chinese judges in the Huawei vs. InterDigital case (pointed out by Mark Cohen in a recent presentation) do not give foreign litigants confidence that their cases will be heard fairly in Chinese courts.  The judges wrote: “Huawei is good at using antitrust laws as a counter-weapon, which other Chinese companies should study…. domestic enterprises [should] break through technical barriers in the development of space for their own gain, through bold use of antitrust litigation.”

If you have further issues to add to the list, please use the comment function!

Supreme People’s Court regulates private (shadow) lending

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private lending

On August 6, the Supreme People’s Court issued its long-awaiting judicial interpretation on private (shadow) lending.  Its provisions are applicable to P2P funding platforms and other lenders not under the jurisdiction of the financial regulators. My article in The Diplomat summarizes the judicial interpretation and its significance.

Updated musings on Supreme People’s Court Vice President Xi Xiaoming

Vice President Xi XiaomingThis updated blogpost muses on Judge Xi Xiaoming, and:

  • phenomena of “assumption of guilt” and trial in the press
  • political factors in Chinese judicial decision-making;
  •  judicial corruption;
  •  implications for related parties;
  •  investigation-centered criminal justice system
  •  effect on lower court judges;
  • the intellectual legacy of Judge Xi;
  •  effect on the credibility of the judicial system.

The comments below are made with no further information about Judge Xi’s case than what is publicly available.

The background

In the late afternoon of 12 July, Xinhua news issued a statement reporting that the Central Commission for Discipline Inspection (CCDI) announced that Supreme People’s Court (Court) Vice President Xi Xiaoming, was under investigation for violation of Party discipline and law.  Judge Xi has worked in the Court for over thirty years and is well known for his expertise in civil and commercial law. The announcement caused shockwaves in the Chinese legal community. Chinese press reports have linked the allegations to a case involving a 420 million RMB dispute over shareholding in a Shanxi coal mine, but the allegations have not been confirmed by the CCDI.

On 20 August, Meng Jianzhu, head of the Central Political Legal Committee, made the following statement about Judge Xi: “Xi Xiaoming has shamed the judiciary, as a experienced judge who has worked in the Supreme People’s Court for 33 years, who has colluded with certain  illegal lawyers, judicial brokers, and lawless business people by accepting huge bribes. “作为在最高法院工作33年的老法官,奚晓明却同个别违法律师、司法掮客、不法商人相互勾结,收受巨额贿赂,这是司法界的耻辱。”

 “Presumption of guilt” and trial in the press

Judge Xi is under investigation by the CCDI and it has not yet been reported that the procuracy has yet filed a case against him.  It does not seem that the lawyers involved in the Shanxi case have been prosecuted or penalized for illegal activity.  Meng Jianzhu’s statement evidences two phenomenon in Chinese criminal justice–the presumption of guilt and “trying” suspects in the press

As Zhu Zhengfu, the vice-chairman of the All China Lawyers Association warned earlier this year, there is a widespread and dangerous “presumption of guilt” among mainland law enforcers.”  Zhu proposed a law be enacted to fully protect each citizen’s right to be presumed innocent until proven guilty.

“An arrest is made on one day, then the next day you have the suspect confessing on television, and some are forced to confess,” Zhu said.

“After the confession, [law enforcers] immediately say the case has been solved and they celebrate their achievement. So you can imagine how much pressure the court is under if it wants to pass an innocent verdict.”

As Si Wejiang of the Debund Law Firm pointed out, CCTV often declares a person guilty even before the procuracy has approved his arrest and does not give his defense lawyer a chance to speak.

Complex politics of large commercial disputes in China

In private comments, several senior Chinese lawyers and other Chinese legal experts have suggested that Judge Xi’s case is not a simple case of corruption, but is tied to more complex political factors.
As two DLA Piper lawyers commented in a Practical Law publication, “large commercial disputes between Chinese parties are usually settled with the help of political influence and/or commercial pressure, with the rule of law methods such as litigation and arbitration either not used at all or used as a bargaining tool.”

They further noted that in recent years “there has been a return to non-rule of law methods of settlement, particularly in relation to disputes involving over CNY100 million.”

The senior lawyers noted that judges hearing cases involving politically powerful litigants (called interest groups in Chinese political jargon) may be under pressure to decide the cases in particular way (as further described in the next section). As time goes on, the litigants may not be as politically powerful as before, and the judgment (and the judges who made decisions) may be called into question.

Corruption in the courts

The corruption allegations are said to be connected to the Shanxi case, reported in further detail in the Caxin report.  But the corruption allegations may be more complicated than they appear.  As several  academic studies have noted, judicial corruption in China has several root causes related to the nature of the judicial system.  In her 2014 book,  The Judicial System and Reform in Post-Mao China, Li Yuwen, Professor of Chinese Law at Erasmus University stated:

First, the lack of judicial independence leaves room for corruption.In practice, when a case is brought to court or assigned to a judge, court officials or the responsible judge are often contacted by various people–the most influential ones are those with government positions….In addition, the lack of recognition of the nature of the judiciary to enforce law fairly and efficiently also results in a puzzling perception of courts and judges….

Secondly, judicial corruption cannot be divorced from its social context…It is unrealistic to expect judges to operate completely outside the social environment, especially in the absence of a workable system to reduce the incidence of judicial corruption….

Thirdly, certain shortcomings of the court system leave the door open for corruption. For instance, the flexible use of the re-trial system leads to the easy re-opening of cases if influential people wish to interfere in the case. This not only diminishes the finality of the case but also creates opportunities for using personal networking to change a court’s judgment. Furthermore, the relatively law judicial salary makes judges an easy target for corruption…In modern-day China, a profession’s income is too often linked to the profession’s social status. Judges’ low salaries are not conducive to building self-respect amongst the profession and, moreover, they constitute a major ground for fostering judicial corruption.

So returning to the social context of 2011. A number of Chinese lawyers and academics have privately noted that at the time of the case in question, it would not be unusual for supplemental payments to be made to Court judges in connection with commercial disputes involving large amounts of money, and refusing payment could also have been awkward for those involved.  Whether this was in fact the case for Judge Xi is not known.

Implications for related parties

It is likely that the anti-corruption investigation into Judge Xi will touch on parties, including other judges, related to the case(s) in question.  It is also likely that the full extent of the investigation will not be made public.

Investigation-centered criminal justice system

Judge Xi is now experiencing the Chinese investigation-centered criminal justice system, in which Party members are generally subject to shuanggui, where they are subject to long periods of interrogation outside the formal criminal justice system, followed by repeated interrogations if and when the case is transferred to the procuracy. His case is part of the current anti-corruption campaign.

As Professor Fu Hualing of the Faculty of Law, University of Hong Kong has written:

The anti-corruption campaign is also a highly politicized process. Investigations are selective, politically motivated, and aim to achieve particular political consequences….

Xi’s campaign further shifts power from legal institutions to the Party’s disciplinary mechanism. Compared with anti-corruption work under the previous government, the current campaign more decisively bypasses legal procedures and institutions. After a brief moment in which law seemed to be able to play a central role in the anti-corruption process, legal institutions have been effectively marginalized to the role of initiating anticorruption
purges of ‘tigers’. There is no longer any meaningful discussion
on the end goals and limits of shuanggui, the Party’s power to detain its own delinquent members and little mention of the creation of a more neutral anti-corruption body.

Effect on other judges?

What will be the effect of Judge Xi’s case on judges in the lower courts, who may not want to find themselves involved in local parallels of his case? Will it lead to further departures of experienced judges?

The intellectual legacy of Judge Xi

Judge Xi has been a major force in the area of civil and commercial law, involved in many major legal developments in China over the past thirty years. He has been involved the drafting of major judicial interpretations, edited many books, and been involved in other major legal initiatives, including, most recently, the drafting of the Civil Code and the establishment of an environmental law research center affiliated with the Court.  The many technical legal reforms in which he has been involved are crucial to the operation of the Chinese judicial system. The initiatives in which he has been involved are likely to go on with other talented people, but he is sure to be missed.

Effect on the credibility of the judicial system

Improving the credibility of the Chinese judicial system is said one of the goals of the Chinese judicial reforms.  We will need to wait and see how Judge Xi’s case progresses, and how both official and unofficial commentators, as well as members of the Chinese public and international community view his case.

Shine light on draft judicial interpretation on “twisting the law in arbitration”!

images-1The Supreme People’s Court and Supreme People’s Procuratorate are together drafting a judicial interpretation on Article 399a of the Criminal Law, the crime of “twisting the law in arbitration.”  My understanding is that one of the criminal law divisions of the Supreme People’s Court is involved in the drafting, rather than the #4 civil division, well-known internationally for its expertise in arbitration issues. According to an article published by the Guiyang Arbitration Commission, in late April, the State Council Legislative Affairs Office distributed the draft to some arbitration commissions for comment.  Given the many legal issues it raises for domestic and foreign arbitrators (and the Chinese government’s international/regional obligations), it should be issued publicly for comment.

What is Article 399a of the Criminal Law?

Article 399a, is part of  Chapter IX:  Crimes of Dereliction of Duty.

Where a person, who is charged by law with the duty of arbitration, intentionally runs counter to facts and laws and twists the law when making a ruling in arbitration, if the circumstances are serious, he shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention; and if the circumstances are especially serious, he shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years.”(依法承担仲裁职责的人员,在仲裁活动中故意违背事实和法律作枉法裁决,情节严重的,处三年以下有期徒刑或者拘役;情节特别严重的,处三年以上七年以下有期徒刑.)

Article 399a,  (which seems to have been drawn from analogous provisions in Japanese and Taiwan law), was promulgated despite protests from the arbitration community. Harsh criticism continues to be published (in Chinese), such as Professor Song Lianbin’s Critical Analysis of the Crime of Deliberately Rendering an Arbitral Award in Violation of LawRecently, Duan Xiaosong, a Chinese law lecturer, published an article in a US law review on Article 399a, but the article apparently did not catch the attention of international practitioners.

Issues include:

  • Article 399a is a duty crime (one committed by officials). How is it that Chinese arbitrators who are not officials, or foreign arbitrators can commit this crime?
  • The procuratorate investigates duty crimes.  This means that the procuratorate must review an award to make a decision whether to investigate whether an award has been intentionally rendered “in violation of facts and law.” Will a procuratorate be able to conduct this review applying foreign law?
  • If a procuratorate prosecutes a case under Article 399a, it also requires a court to undertake a substantive review of an arbitral award.
  • Judicial interpretations of both the Supreme People’s Court and Procuratorate raise important issues.  As suggested in several earlier blogposts, part of the judicial reforms should include greater requirements for public comment on draft judicial interpretations. Depending on how familiar the US and EU bilateral investment treaty negotiators are with the details of Chinese law, this may be raised by negotiators.

Comment

Because this judicial interpretation has implications for China’s obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and the analogous arrangement with Hong Kong, the draft should be made public so that the greater arbitration community, domestic and foreign, is able to provide detailed analysis and commentary on it. This is the interests of the international and Chinese legal communities.