Five ways to get your order enforced

Enforcement was a key theme at the inaugural asialaw Asia-Pacific Dispute Resolution Summit, which took place in Hong Kong earlier this month, with speakers stressing the importance of investigating the losing party and getting the Chinese courts to recognise arbitral awards to ensure that the court victory is enforced.

The losing side to a dispute often anticipates the result and hides its assets in shell companies or third parties, which creates difficulties when collecting damages. The session titled “Enforcement: ensuring you get the money you're owed” highlighted these risks and laid out tactics to stymie such efforts. The “Disputes involving China: obstacles and traps to watch out for” segment discussed the challenges of getting Chinese courts to enforce arbitral awards, especially those handed out overseas, as well as possible litigation strategies.

1. Identify the assets

There are always gaps in the debtors' attempts to hide their assets, which the winner needs to locate and exploit through thorough analysis, said speakers at the enforcement session. “The assets are rarely owned by an entity or structure located nearby,” said Cosimo Borrelli of Borrelli Walsh. “You seldom find a Chinese asset held by a Hong Kong company in such situations, for instance. Traditional measures often don't work.”

William McGovern of Kobre & Kim listed some key challenges:

• The debtor operates in one jurisdiction but is incorporated in another. Almost 40% of companies listed in Hong Kong are incorporated in the BVI, Cayman Islands or other locations and nearly all investments into China are made using offshore vehicles and holding companies entered through wholly foreign-owned enterprises (WFOEs) or joint ventures (JVs);
• The debtor has incorporated layers of onshore and offshore entities to thin out its assets;
• The debtor has moved to conceal the assets using vehicles such as trusts; and
• The question of whether enforcement of the judgment can be recognised where the assets are located. Recognition in China is particularly difficult and public policy can interfere with the process.

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2. Locate the assets

Assets can often be found using forensic accounting or publicly available information. The creditor is likely to have knowledge about the debtor, as litigation usually arises from a previous relationship.

As well as physical visits to sites, information can be mined from industry bodies, company and land registries and databases. “AICs [Administrations for Industry and Commerce] will provide a healthy amount of information about Chinese parties," said Borrelli. "Much evidence, such as shareholder capital, is now available online as well.''

3. Bring the debtors to the table

Once you have ascertained the assets and capital structure, the key is to find "pressure points, bring the debtors to the bargaining table and convince them you have the tools to make them talk sensibly,” said Neil McDonald, who moved to Kirkland & Ellis from Hogan Lovells this month. “Saying you know about any offshore entities tends to get their attention quickly.”

Getting debtors to negotiate involves utilising tools that compel discovery from the losing parties themselves or from third parties that possess the information (such as banks), freezing the assets and converting them into a direct order by the court. “Using covert tools that keep the investigation outside the view of the debtor is important and very powerful,” said McGovern. “Subpoenas can get you the debtor's profile through banks without them knowing.”

4. Devise court strategies

McDonald noted that China's courts are increasingly recognising the need to protect creditors' rights. “It is remarkable how we have been able to get evidence and act preservation in China,” he said. “While you still face local protectionism, you can go through other courts, like Shanghai as opposed to Qingdao.”

Deciding where to pursue the case is critical. “Enforce the awards in bigger cities, like Beijing, Shanghai and Guangzhou, where judges are more familiar with international arbitration and foreign cases,” said Kun Fan, a professor at the Chinese University of Hong Kong who spoke at the China panel. She gave the example of the world's largest yogurt maker Groupe Danone, which won a Stockholm arbitration ruling against its Chinese partner Hangzhou Wahaha Group, but lost all its legal and enforcement battles in China. “You can foresee what the outcome is when you bring a case into the opposing party's home court, where the Chinese company is highly influential,” she said.

Although statistics have shown that most international and Hong Kong arbitral awards have been accepted by Chinese courts over the last decade, the most serious problem lies with delays. Fan explained that in cases where applicants were able to enforce their awards in court, only 34% were able to recover the total sum. One Australian company obtained an award to get all its money back from Rizhao Steel in August 2010 but ended up settling for a smaller sum more than a year later. Filing a timely application helps secure measures.

5. Don't leave contractual holes

The regulation of burden of proof on contractual disputes is general and the Supreme People's Court is yet to clarify a discovery procedure in civil lawsuits. Nonetheless, parties may negotiate and agree on discovery terms in their contract.

Discovery is related to, but separate from, burden of proof. However, it can be valid as long as the agreement does not violate any laws and does not run counter to the rules recognised by the legal community. “Add a clause for document provision to the contract. This may make it easier to shift the burden of proof to the other party, and there is nothing to lose if this clause is not supported by the judge,” said Weining Zou of Jun He.


By Katherine Jo