New regulations on enforcement settlements, guarantees

By Cheng Bing and Zhao Qian, AnJie Law Firm
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Three judicial interpretations, all due to take effect on 1 March 2018, were released by the Supreme People’s Court (SPC) on 23 February 2018 with the aim of further alleviating the difficulties of enforcement actions. These include the Regulations of the Supreme People’s Court on Several Issues Concerning Settlement Agreements Concluded during Enforcement Proceedings, the Regulations of the Supreme People’s Court on Several Issues Concerning Guarantees Provided during Enforcement Proceedings (together, the new regulations), and the Regulations of the Supreme People’s Court on Several Issues Concerning Enforcement of Arbitral Awards by the People’s Courts. It is believed that enforcement relating to actions and proceedings involving civil and commercial disputes will benefit significantly from the introduction of the new regulations.

程冰 CHENG BING 安杰律师事务所律师 Attorney AnJie Law Firm
程冰
CHENG BING
安杰律师事务所合伙人
Partner
AnJie Law Firm

Q: Under what background are the new regulations introduced?

A: China did not have a well established legal framework for settlement agreements and guarantees concluded or provided during enforcement proceedings (enforcement settlements and enforcement guarantees) until these judicial interpretations were introduced. Especially, there were no specific operational regulations for enforcement guarantees, which play an instrumental role in helping creditors enforcing their debts.

On the other hand, the previous regulations concerning enforcement settlements were not as meticulous as desired, compared with evolving enforcement practices. That was why sometimes courts issued inconsistent orders for similar enforcement cases. In general, one would find it difficult to seek proper protection under the previous legal framework, which, due to a lack of accuracy and thoroughness, would add to the difficulty of court enforcement and give rise to situations where different courts may enforce similar rulings or awards with various approaches and results.

Q: How do the new regulations supplement and refine the existing ones concerning enforcement settlements and guarantees?

A: First, the new regulations distinguish enforcement settlements from those concluded other than during enforcement proceedings, prohibiting courts from ordering repayment with physical assets based on enforcement settlement agreements, providing enforcement applicants with the right to choose from options when enforced parties fail to fulfil their enforcement settlement agreements, acknowledging the validity of guarantee clauses in enforcement settlement agreements, and providing remedies for delay or defect in performing enforcement settlement agreements.

Second, in respect of enforcement guarantees, many important stipulations have been introduced under the new regulations, which specify qualifying conditions of enforcement guarantees, highlight autonomy of the parties concerned with respect to the suspension period, give detailed operational guidelines for enforcement guarantees, clarify conditions for companies to provide enforcement guarantees, and establish approaches through which enforcement guarantees may be realized.

Q: How are the new regulations expected to affect enforcement relating to actions and proceedings involving civil and commercial disputes?

A: Improving the existing enforcement framework by filling many legal loopholes revealed in practice, the new regulations provide supportive, practical and well-regulated guidelines for enforcing judicial decisions.

Taking a balanced approach to the interests of interested parties, including enforcement applicants, enforced parties, guarantors and creditors who are not parties to the cases, the new regulations also reflect tremendous efforts by the SPC to maximize the protection for the legitimate rights and interests of interested parties. Therefore, the introduction and implementation of the new regulations will provide further support for the realization of judicial equity.

赵倩 ZHAO QIAN 安杰律师事务所律师 Attorney AnJie Law Firm
赵倩
ZHAO QIAN
安杰律师事务所高级律师
Senior Associate
AnJie Law Firm

Q: According to the new regulations, what are the key considerations for parties involved in enforcement settlements and enforcement guarantees?

A: First and foremost, it is important that enforcement settlements and enforcement guarantees comply with procedural and format requirements. First, to ensure that the enforcement settlement (or enforcement guarantee, as the case may be) is judicially recognized, the enforcement settlement or guarantee agreement must be reached in writing. The parties concerned may either submit a signed copy of the settlement or guarantee agreement to the court, or sign records containing their enforcement settlement at court. Second, to avoid being held invalid, the enforcement settlement agreement must clearly cover all matters required under the new regulations. Third, in the case of enforcement guarantees, collateral registration procedures must be completed for the security interest to ensure compliance with the publication requirement, which is necessary to render it valid against bona fide third parties.

The parties concerned should also pay attention especially to the conditions and deadline for enforcing their rights. Take an enforcement settlement for example. To affirm and support the principles of equality and voluntarism characterizing civil relations, an enforcement applicant is not allowed to change his/her mind and request a court order for resuming enforcement proceedings insofar as the enforced party is fulfilling his/her obligations as required by the enforcement settlement agreement. Likewise, if the enforcement applicant fails to file a petition for enforcing the collaterals or any other assets of the guarantor during the period when an enforcement guarantee is valid, the court will not support any similar petition from the applicant beyond that period.

When reaching an enforcement settlement agreement, the enforcement applicant and the party against whom the petition is filed should design the settlement solution prudently, avoiding “enforcement settlement conditional upon a commitment to lift preservation measures”, making sure that their intents are clearly and properly embodied in the guarantee clauses, and reserving the right to a retiral.

Last but not least, the “guarantor” should be careful not to expose him/herself to risks when signing an enforcement guarantee agreement for the benefit of any other person. Since enforcement must be based on an effective legal decision, typically a guarantee agreement is not taken as the basis for enforcement until it is reviewed in court proceedings.

However, according to article 11 of the Regulations of the Supreme People’s Court on Several Issues Concerning Guarantees Provided during Enforcement Proceedings, which provides further debt enforcement support by allowing enforcement applicants to enforce enforcement guarantees directly, courts may order enforcement on petitions from applicants without regard for the said rule if they deem fit under the circumstances, and provided that certain conditions are met.

Cheng Bing is a partner and Zhao Qian is a senior associate at AnJie Law Firm

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