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November 28, 2011

Debt Collection

It is reported that the average life expectancy of small and medium-sized Chinese enterprises is 2.9 years; the average life expectancy of Chinese conglomerates is 7 to 8 years. In consideration of 90 percentage of  Chinese enterprises fall into the first category, the average life expectancy of Chinese enterprises is around 3.5 years only. The severe competition contributed the status quo, arisen the constantly credibility crisis in Chinese business transactions.

Paying enough attention on risk prevention – rather than collecting debts, it is better to keep your money safe before it is not. As mentioned above, Chinese enterprises are facing a credibility crisis, and the law, the government policies have failed to come up with methods to handle the situation. Therefore when close a deal or lending out a big loan is crucial and may be a result of diligence.

Most debtors, especially those trustworthy ones were willing to repay the loan back at the beginning. However as time goes by, they are taking chances by not repaying it at all, the legal consequences in China are not much against the debtors who are deliberately delaying the paying. Basically it comes down to: The longer a debt, the harder to collect it. Any change in a company, such as the change of its legal representative, shareholders, company name and so on, could complicate things. Although the law stipulated creditors’ litigate rights under such changes, the ignorance of law has once again done as it has done it the past, making it more difficult to collect.

Your company has overdue loans? Take action now!

You don’t really need to collect debts on your own because:

  • It could be to the detriment of a well established relationship between the you and the debtor, if the debtor was willing to pay back there is no need to get a third party involved. But if the debtor took the good will for granted, it is better to engage a professional to do the dirty job. Not only would keep the relationship healthy, but you would also get the money back more efficiently.
  • Usually, there were reasons why the debtor delayed and/or refuse to pay the debt back, in some cases the debtor even thinks that he hold a litigate ground not to repay it. You would find it extremely hard to reason with the the debtor. A legal professional knows the law, and skilled of debt collecting techniques, and has access to social resources such as judicial means, could be of great help.
  • It is cheaper to let a professional to handle the debt collection (unless we are talking about illegal debt collection–there are people do whatever it takes to help you get the money back, and they took 30- 50 percentage fee out of this!)

Case: Useful Tips on Signing Goods Delivery Contract

Background

In a factory, the Seller had goods delivered to a Trading company, the Buyer. Shortly after the Buyer got sued by a third trading company before the payment was being fulfilled. The goods was seized under the order of the People’s court.

Prevention & Solution

a. If the buying and selling of the contract has stipulated that the title to the goods reserved until the payment to the goods fulfilled, the Seller could have the goods retrieved, by proving the Buyer failed to fulfill the payment.

b. If there is no such clauses as above, you can only resort to the complicated Chinese juridical system to resolve the case, e.g. file a lawsuit against the already-in-trouble Buyer.

Alternative Method

If you are uncertain about a Buyer you are trading with, just ask if he or his company could have a trustworthy third party involved as Guarantee. Under Chinese laws, there are two types of joint liabilities sustained by a Guarantee: 1) interested parties agreed the Guarantee shall have to compensate the Seller who sustain loss only after the Buyer failed to fulfill the payment; 2) interested parties agreed the Guarantee shall have to compensate the Seller who sustain loss as soon as the payment delayed or couldn’t fulfilled by the Buyer before the deadline that stipulated in the contract.

Just make sure you can claim your loss directly from the guarantee once the payment delayed!

November 28, 2011