Debt Collection Made Easy? Notarizing Creditor’s Rights

February 2007

Imagine an express lane for collecting debt in China. Too good to be true, right? Not necessarily. If a creditor notarizes payment obligations due to it, collection from a debtor may be significantly streamlined, avoiding resource intensive litigation. However, not all creditor/debtor relationships qualify for notarization and, as with most things, there are no guarantees.

Notarizing Creditor’s Rights
In order to effectively notarize the creditor’s rights, a creditor and debtor must enter into a creditor’s rights document (the “Document”) that must be notarized by a Chinese public notary. The following criteria must be met in order for the Document to qualify for notarization:

(i)    The subject matter of the Document must be regarding cash payments, delivery of goods or delivery of securities;

(ii)   There are no disputes between the debtor and the creditor regarding the rights and obligations set out in the Document at the time of notarization; and

(iii)  The Document must contain an express statement that the debtor accepts notarized enforcement of its obligations to the creditor in the event that the debtor fails to perform or fully perform its obligations to the creditor.

Enforcement Procedure
The debtor and the creditor must notarize the creditor’s rights document at a duly authorized Chinese public notary. If, at some point, the debtor fails to fulfill its obligations set out in the Document, the creditor can apply to obtain an enforcement certificate (“Certificate”) from the public notary that originally notarized the Document. Upon obtaining the Certificate, the creditor can turn to the relevant People’s court to seek enforcement of the Document and Certificate. After examining the Document, Certificate, and other relevant supporting documents, the court will determine whether it can enforce the Document and the Certificate.

Refusal to Enforce
Not all Documents are enforceable. Courts will examine the Document and the Certificate in terms of form and substance. The court may refuse enforcement if it finds procedural or substantial errors in the Document or the Certificate. In such instance, a party may approach the public notary to correct the error, if such error is amendable, and then re-apply at the relevant court for enforcement of the Document. However, if the error can not be modified, the Certificate will be revoked by the public notary and the creditor will have to initiate litigation against the debtor.

The court may also refuse to enforce the Certificate if a reasonable dispute between the debtor and creditor arises from the Document. In such instance, the parties may refer the matter to the relevant public notary for mediation of the dispute and initiate litigation, if the mediation fails. Alternatively, the parties may initiate litigation without initiating mediation. However, only substantial civil disputes may disrupt the enforcement process. Substantial civil disputes are non-criminal and non-administrative material disputes regarding the subject matter of the Document.

Statute of Limitations
There is no express statement in law as to when a creditor must seek to enforce its rights set out in the Document. Therefore, it is commonly accepted that if either the creditor or debtor (or both) are natural persons then the creditor must apply to enforce its rights within 12 months from the due date of fulfillment of the obligations as set out in the Document. If both parties are legal persons or other organizations, then the creditor must apply to enforce its rights within six months from the due date.

Relevant Court
The creditor must seek enforcement of the Document and the Certificate with the People’s court in the jurisdiction where the debtor resides or has property.

Conclusion
Notarization is a useful structure that provides a convenient way to collect debt at a lower cost in terms of money and time. Notarization is utilized in a variety of transactions, such as loan agreements, gift contracts, damages contracts, maintenance agreements or purchase agreements. Given the special requirements and procedures for notarization, take care to ensure that the notarization process is properly adhered to and the subject matter of the Document is appropriate for notarization. The critical question still remains – does the debtor have assets with which to fulfill its obligations?

Additional Notes
Unified Tax Policy Down the Line
A draft bill that calls for the unification of China's corporate tax is in the works. The proposed change in the tax regime will be particularly relevant to foreign invested enterprises (e.g., joint ventures or wholly foreign-owned enterprises) (“FIEs”). A unified corporate tax rate of 25 percent for FIEs and domestic enterprises without foreign investment may replace a two-tier tax structure of 15 percent for most FIEs and 33 percent for domestic enterprises.

As drafted, the bill will deliver tax incentives but the incentives are activity-based, not nationality-based. Enterprises engaged in sectors deemed critical to China’s economy (e.g., shipbuilding, insurance) would enjoy tax incentives. The draft bill allows for a five year grace period for impacted enterprises.

Foreign Direct Investment Seminar Delivered
Late January 2007, China Solutions LLC delivered a seminar regarding foreign direct investment in China at both Georgetown University and the Association of the Bar of the City of New York. Follow the link for the corresponding power point presentation www.chinasolutions.com.cn/CSAlert.htm (for viewing within China) or www.chinasolutions.us/CSAlert.htm . Previous seminars delivered include: Contract Law in the PRC Context, Combating Fraud in Trade and Foreign Direct Investment in China.

©2012 All content of this article is the property and copyright of China Solutions Inc and may not be reproduced in any format without prior express written permission. The content of this article is intended to provide a general guide to the subject matter and should not be treated as a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein.

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