Branches require careful strategy selection in litigation cases

By Vincent Mu and Zhou Chengcheng, Martin Hu & Partners
0
1079

For some business operators, the establishment of branches to carry on business activities is a relatively ideal business framework. Pursuant to the Company Law, a branch neither has independent legal personality nor its own independent property. Once a party is involved in a dispute with a branch, it will, in formulating its litigation strategy, often be vexed by such issues as selection of the defendant, jurisdiction and enforcement. This column seeks to clarify and analyse these issues with current PRC law.

Competent defendant

One theory holds that since a branch is not an independent legal person, it lacks the qualifications to serve as a defendant in a litigation case. This is a misunderstanding. Article 48 of the Civil Procedure Law specifies that “any citizen, legal person or other organisation may be a party to a civil action … Other organisations shall be represented in litigation by the main person in charge thereof”. So, participation by a branch in litigation as “another organisation” that has a “main person in charge thereof” does not run counter to the provisions of principle of the Civil Procedure Law.

牟笛 Vincent Mu 胡光律师事务所 资深律师 Senior Associate Martin Hu & Partners
牟笛
Vincent Mu
胡光律师事务所
资深律师
Senior Associate
Martin Hu & Partners

The Opinions of the Supreme People’s Court on Several Issues Concerning the Application of the Civil Procedure Law of the People’s Republic of China further specify that “other organisations” in the above provisions include “organisations that are lawfully established, have a certain organisational structure and property, but do not have legal personality, including: (sub-)branches that are lawfully established by legal persons and have business licences”. This constitutes the direct basis for the independent participation by branches in civil actions.

It can be held that branches possess the relative qualifications of a subject of litigation – any branch that has been established in accordance with the law, has a business licence and has a certain organisational structure and property can become a defendant in a legal action. Whether a branch fulfils all three conditions can be determined by looking up its business registration information.

As the legal liability of a branch will ultimately be borne by the company to which it belongs, in practice plaintiffs will generally name both the branch and the company as defendants in a case. This manner of proceeding has been widely endorsed in trial practice.

Jurisdiction of a case

As the business function of a branch lies in expanding the business coverage and avoiding the legal risk of the company to which it belongs, branches are generally established in less economically developed regions where defects such as trial quality, trial efficiency, litigation costs and even local protectionism are common.

Based on the analysis in the first part above, a plaintiff, in such a circumstance, may name the company to which the branch belongs as a co-defendant, and utilise the provision on “jurisdiction of the place where the defendant is domiciled” in the Civil Procedure Law to have the case transferred to a more ideal location for trial. This, too, is a skilful move often used when formulating the strategy for a litigation case involving a branch.

Judgment debtor

The Company Law specifies that a branch does not have independent property and that civil liability is borne by the company to which it belongs. So should a party seek enforcement against the branch or the company to which it belongs? The Provisions of the Supreme People’s Court on Several Issues Concerning the Enforcement Work of People’s Courts (for Trial Implementation) provides an answer pursuant to article 78: “Where the (sub-)branch of an enterprise with legal personality is unable to discharge the debt, a ruling naming the enterprise with legal personality as the judgment debtor may be rendered.

“If the property directly operated and managed by the enterprise with legal personality is still insufficient to discharge the debt, the People’s Court may render a ruling that enforcement be taken against the property of other (sub-)branches of the enterprise with legal personality.”

It’s as if this provision was hinting at a sequence of enforcement when a branch is involved: the first judgment debtor is the branch itself, and only when its property is insufficient for repayment can the enforcement extend to the company to which it belongs, even other branches. It is inevitable that such a provision raises questions: First, given that the Company Law holds that a branch does not have independent property, how can enforcement be taken against it? And second, is “from branch to the company to which it belongs, and other branches” a mandatory sequence?

周成成 Efar Zhou 胡光律师事务所 律师 Lawyer Martin Hu & Partners
周成成
Efar Zhou
胡光律师事务所
律师
Lawyer
Martin Hu & Partners

Even though a branch does not have independent property, it does have property that it actually controls and manages, which can be the target of enforcement. In theory, the property and liabilities of a branch inure to the company to which it belongs. From this it can be seen that enforcement against the branch is the appearance, whereas enforcement against the company to which it belongs is the reality.

It is precisely for this reason that the law specifies that enforcement against a branch not only can be expanded to the company to which it belongs, but can even include other branches. There is a fundamental difference between this and enforcement against a subsidiary, which generally cannot be extended to the head office and other subsidiaries.

Second, based on that analysis, the phrasing “from branch to the company to which it belongs, and other branches” does not constitute a mandatory sequence, but is rather something that is advocated. Given the fact that the plaintiff is more familiar with the circumstances of the branch with which it is trading, the law recommends that it first attempt enforcement against the branch.

The phrase that “the property of the branch is insufficient to make repayment” does not require the plaintiff to exhaust all avenues of relief.

So long as the plaintiff initially believes that there are impediments to enforcement against the branch, it may propose to effect enforcement against the company to which the branch belongs, and other branches.

We recommend that at the enforcement stage plaintiffs ascertain in advance all the leads pertaining to the property of the branch involved in the case, the company to which it belongs and other branches, and submit them all at once to enhance the probability for successful enforcement.

Vincent Mu is a senior associate and Zhou Chengcheng is an associate at Martin Hu & Partners

Martin_Hu_&_Partners_logo

胡光律师事务所

上海市芳甸路1155号浦东嘉里城办公楼8楼

8/ Floor, Kerry Parkside Office

1155 Fangdian Road, Pudong

Shanghai, China

邮编 Postal code: 201204

电话 Tel: +86 21 5010 1666

传真 Fax: +86 21 5010 1222

www.mhplawyer.com

胡光 Martin Hu

电子信箱 E-mail: martin.hu@mhplawyer.com

牟笛 Vincent Mu

电子信箱 E-mail: vincent.mu@mhplawyer.com