Nowhere to hide

(i) name of the judgment debtors;

(ii) ID card number or organisation code of such debtors;

(iii) name of the relevant court;

(iv) case number;

(v) executed objects; and

(vi) current condition of the judgment.

The Supreme People's Court plans to introduce additional data segments gradually upon the public's need and request.

One significant disadvantage for foreign users is that the database can only be accessed in Chinese. Nevertheless, the database provides an inexpensive, reliable and simple platform for accessing information related to an individual's or organisation's status as a judgment debtor. To fully comprehend the critical role this database can serve in debt collection, however, one must look at the Chinese debt collection system.

Weaknesses of China's debt collection system

Under Chinese law, enforcement of judgments is essentially left to the control and discretion of the courts. After litigation and a judgment in its favour, the creditor must apply to the court for the compulsory enforcement of an executed judgment which, if approved, will then be handled by the court's execution department. The court has the exclusive authority and responsibility to serve notice to the debtor and order the debtor to fulfil its obligations. If the debtor fails to comply, the court has the power to compel performance through methods including freezing bank assets of the debtor, garnishment of wages, seizure and auction of property, and issuing fines. The creditor, however, possesses no legal authority to demand inquiries concerning the debtor's assets or to utilise any of the tools available to the court.

Several problems arise with this court-centred system. From the creditor's perspective, the procedural application for compulsory enforcement incurs unnecessary fees and other expenses that may not be recuperated. Further, the creditor has the greatest financial incentive and motivation to locate assets and take prompt action, but is rendered powerless and completely dependent upon the court for enforcement. Finally, even with an application for compulsory enforcement, the creditor still encounters many practical difficulties in enforcing the judgment.

Why does enforcement continue to elude even the most competent Chinese courts? First, the court frequently leaves the task of locating and providing necessary details of relevant assets to the plaintiff, for whom it may be challenging – if not impossible – to determine the location of a debtor's assets. Second, the lack of a transparent case reporting system in China leaves the court little incentive for proactive collection of judgments. In fact the prompt discharge of these responsibilities is often subordinate to the interests of the court, such as heavy caseloads or even local protectionism. Third, an intelligent debtor generally has ample time to conceal assets through a variety of means (such as asset transfer). The new online inquiry database, then, is designed to respond to these challenges.

The role of the new database in debt collection

The primary purpose of the new database system is to increase compliance with executable judgments issued by Chinese courts, a task that has been notoriously difficult in China. As well as providing critical information for due diligence evaluations, the database uses potential reputational loss to pressure the debtor into satisfying its obligations and the courts into facilitating debt collection.

In the past, investors lacked reliable information regarding outstanding executed judgments. Companies have traditionally been required to seek this information from individual courts, who are often busy and reluctant to co-operate. Further, a company would have to search by each individual court making it onerous at best, and impossible at worst, to determine whether a company has been involved in litigated disputes. Companies can now incorporate this information into their due diligence analysis and perform a more meticulous evaluation of an entity's financial stability. This can be critical for determining a potential business partner's dependability in commercial contracts, as well as for evaluating target companies for mergers and acquisitions.

The database could thus potentially affect a debtor's reputation as a desirable future business partner. This will give debtors greater incentive to settle their debts in order to protect future interests. A loss of business credibility can be extremely detrimental to the ability to cultivate professional relationships and engage in business negotiations. As such, the transparency of this database system may pressure companies to be more diligent in satisfying their debt obligations. But the system will only be effective insofar as businesses use it as a due diligence mechanism before formalising business arrangements.

The new database also pressures courts to facilitate the execution of judgments. A court's reputation could be tarnished if it accumulates a list of uncollected judgments. A judge's career movement and pay scale often rests on the reputation of his or her court as a competent authority, and uncollected judgments may hinder a judge's professional advancement. In this way, motivating judges to assist by potentially increasing their personal stakes may be an effective means of improving debt collection.

Courts may respond to the new database in several ways: as described above, they may undertake a more proactive role in the collection of debts; secondly, judges may pressure parties to settle. Mediation from the bench is popular in China for a variety of reasons including local protectionism and the desire to complete cases and meet quotas. Another reason, which may be exacerbated by the new database, is that mediation can be effective in situations where the court knowingly lacks the power to enforce any award. In this manner, judges can avoid outstanding enforcements on their record while the plaintiff at least walks away with partial compensation. It is hoped that courts will not use this database to avoid judgments against notoriously bad creditors in order to ensure a clean record in the database and avoid potential damage to the court's reputation.

A harbinger of better enforcement

The new online database seeks to improve risk analysis in due diligence for selecting business partners and target companies, and increase the enforcement of executed judgments by Chinese courts. Although still untested, it is a tremendous step forward in addressing the issues related to debt collection.

Authorities point to the database as a prelude to an expansive system designed to improve enforcement of court rulings nationwide. Co-operation with other institutions, such as banks and property management departments, can facilitate a joint deterrent system that will affect judgment scoffers in all areas of their business. The 2008 amendments to the PRC Civil Procedure Law embody these concepts and give clear indication that China is working toward a more comprehensive system of debt collection.

The new database, combined with plans for a more extensive deterrence structure, evidences China's willingness to improve its debt collection system, and with these efforts may come a fresh sense of optimism surrounding the enforceability of debt obligations in China.

Seth T Buckley and Maarten Roos, Wang Jing & Co

Tips and strategies

1 Conducting a search with a common name (for a business and especially for individuals) can lead to an extensive and arduous list of results. If possible, try to obtain the identity card number for an individual search, or the organisational code for a company search, thereby efficiently reducing the number of results and saving time and related cost.

2 For law firms and corporations often engaged in litigation, it may be useful to maintain an internal list of relevant courts' enforcement records. At the moment, such information would have to be compiled by the researcher, as no variables exist in the database to search for specific courts. This information may prove valuable in developing case strategy as it could evidence the likelihood of the court's assistance in obtaining executed judgments.

3 While this database can provide valuable information to (potential) plaintiffs, it is still advisable to combine any lawsuit with asset preservation, in which the plaintiff petitions the court to freeze the assets of another party. Preserving specific assets of the debtor over the course of litigation can ensure there are adequate resources available for the compensation of a judicial award. However, the court will require a guarantee, usually paid in cash, for the preservation of the asset, and this fee can range from 30% to 100% of the value of the asset, depending on the jurisdiction. This can be a significant amount of cash, especially for a foreign enterprise whose cash reserves are often located overseas. Also, asset preservation does not circumvent the task of locating the relevant assets, a responsibility usually left to the plaintiff.