As non-performing assets (NPAs) continue to increase and the regulator is under more pressure in recent years, domestic financial institutions face higher requirements for their efficiency in NPA disposal. In the meantime, the RMB1 trillion (US$144.42 billion) market of NPAs has attracted extensive attention from overseas investors, who generally have concerns about the investment risks increased by difficulties in judicial enforcement of collaterals. This article will discuss the difficulties in collateral disposal, and the solutions.
The conflict of enforcement power, between the court that first seals up the collaterals and the court of mortgage enforcement, holds back enforcement. If the collaterals have first been sealed up by a court, this court shall be responsible for collateral disposal in principle. If no auction announcement is made or no sale process is initiated for more than 60 days of the date of first seal-up, the court of mortgage enforcement may request transfer of the sealed-up collaterals for its enforcement. The court that first seals up the collaterals should transfer these to the court of mortgage enforcement within 15 days of receipt of the letter requesting transfer for enforcement.
In practice, however, the court that first seals up the collaterals may refuse the transfer for various reasons, and thus hinders the enforcement of collaterals. Such circumstances are not rare.
The mortgagee, as the direct stakeholder, may also consider the following two remedial approaches, in addition to explaining to the court that first seals up the property the adverse impact of deferred enforcement on the mortgagee:
(1) Application for enforcement by courts at higher levels. The Civil Procedure Law provides that when a court fails to conduct enforcement within six months after receiving a written application for enforcement, the applicant for enforcement may apply for enforcement to the court at the next higher level. The Enforcement Bureau of the Supreme People’s Court further explains that the superior court may decide enforcement of a case by the superior court, or assignment of enforcement of the case to another court, when it believes it is necessary. Therefore, the mortgagee may apply to the court at the next higher level than the court that first seals up the collaterals for enforcement.
(2) Application for overseeing of enforcement. This more rapid and convenient approach is often ignored. Superior courts are responsible for overseeing erroneous decisions, rulings and actions of the inferior courts in enforcement, as well as the cases inactively enforced by the inferior courts. In practice, the superior courts will oversee the enforcement for conformity to applicable provisions. When they receive a complaint or petition, they will send material regarding case enforcement to the court of enforcement in the form of a supervision letter or reminder letter, and listen to its report or follow up its enforcement by telephone. Most courts deem overseeing of enforcement as a part of their enforcement work and assign a full-time person to overseeing case enforcement. When a court receives a complaint, it will handle it and see to rapid enforcement of the case.
Legal measures provided in civil and criminal laws can be combined to cope with malicious disposal of collaterals by the party subject to enforcement. In practice, in addition to transfer and concealment of property to avoid enforcement, the party subject to enforcement often rents the collaterals that have been sealed up to challenge the enforcement. At the level of civil laws, the Property Law provides that when the property under mortgage is leased after the right to mortgage is established, the lease relationship may not challenge the registered right to mortgage. The court generally disposes the property under mortgage by auction while maintaining the lease relationship. Related encumbrance will be disclosed in the auction announcement. At the level of criminal law, malicious lease by the party subject to enforcement to challenge the enforcement may constitute the crime of refusal to satisfy court judgment or verdict, or the crime of illegal disposal of sealed-up, detained or frozen property. Application of provisions of criminal laws in enforcement of civil cases is also an effective method to accelerate enforcement of creditor’s right to NPAs.
The crime of refusal to satisfy the court judgment or verdict is a serious act by which the party subject to enforcement has the ability but refuses to satisfy the court judgment or verdict. “Serious” generally means the circumstances under which the party subject to enforcement illegally disposes of the property after receiving the enforcement notice, and the court judgment or verdict cannot be enforced as a result. As the Supreme People’s Court does not stipulate the circumstances under which “it is impossible to enforce a judgment or verdict”, the high courts in some provinces generally define that “a judgment or verdict is not enforceable when the party subject to enforcement, or the provider of security, transfers or conceals the assets of more than 10% of the enforcement subject after the enforcement notice is served.”
In addition, the debtor may be investigated for liability for the crime of illegal disposal of sealed-up, detained or frozen property. This charge is applicable not only to enforcement but also to property preservation. Its scope of application is broadened as it does not require that the offender deliberately refuses to satisfy court judgments.
In terms of practice, the authors recommend that the creditor should first survey the collaterals on the spot, take photos and videos, learn about whether the collaterals are leased or not, and investigate the flow of illegal gains. When the creditor gathers the evidence, it may submit it to the court of enforcement and apply for transferring the party subject to enforcement to the public security authority for investigation, or directly report the case to the public security authority.
As the public security authority, the procuratorial authority and the court are inconsistent in understanding of the criminal act in the process of enforcement, many applicants for enforcement directly report to the public security authorities in practice. No matter what method is used, as long as the party subject to enforcement is investigated for a criminal act, the public security authority may treat the party subject to enforcement as a target of cyber pursuit if such party refuses to co-operate. Therefore, the party subject to enforcement will be under more pressure than civil enforcement.
Xu Bangwei is a partner and Song Tangyin is a paralegal at Jingtian & Gongcheng
Jingtian & Gongcheng
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