Dealing with debt and winding up a business in China can trap the unwary, writes John Church

It’s not a desirable scenario. A foreign company owes money to angry creditors, losses cannot be retrieved, business partnerships have soured, things are not as they should be. Time to wind things up and leave. But when and how you do so, and indeed if you can, are all factors that need to be carefully weighed up in any China exit strategy.

For foreign businesses operating in China, due diligence is often an afterthought that can cost them dearly.

Take the example of one US businessman, whose story was widely reported earlier this year. Steve Fleischli was forced to surrender his passport and not allowed to leave China because of his company’s unpaid debt to local firms. Fleischli was head of the company and also apparently its legal representative in China. He was subsequently relieved of his position with the company.

Circumstances surrounding this action, details of the company’s debt position and Fleischli’s reported claims that he was not aware of his role as legal representative are all unclear. “I had no clue,” Fleischli reportedly told the St Louis Post-Dispatch newspaper in the US of his predicament earlier this year. “I’m an American guy over here in China. I can’t read Chinese. I had no idea what a legal rep even was.”

What is clear is that those caught up in such legal cases cannot expect assistance. This, for example, from the US State Department’s website: “If you become involved in a civil business dispute in China, the Chinese government may prohibit you from leaving China until the matter is resolved under Chinese law. There are cases of US citizens being prevented from leaving China for months and even years while their civil cases are pending. In some cases, defendants have even been put into police custody pending resolution of their civil cases.”

The website further advises: “Some local businesspeople who feel that they have been wronged by a foreign business partner may hire ‘debt collectors’ to harass and intimidate the foreigner in hopes of collecting the debt. Foreign managers or company owners have in some cases been physically detained as leverage during dispute negotiations. The US Embassy and consulates general have no law enforcement authority in China and cannot recommend a specific course of action, give legal advice, or lobby the Chinese government regarding a private citizen’s commercial dispute.”

There have also been reports this year of a number of kidnappings of Indian businessmen in the city of Liwu over unpaid debts. The abductions prompted an Indian Embassy advisory on the matter, and diplomatic bristling followed from both sides, with China warning bilateral ties could be threatened, The Times of India reported at the time.

So commercial disputes are a serious business, and whether you are pursued within the letter of the law or not, there are definitely circumstances to be avoided.

“I wouldn’t say there’s been an increase in these types of cases – we have been seeing it all along,” says Violet Ho, senior managing director and head of Kroll Advisory Solutions’ operations in Greater China. “Often we advise clients on aspects of this and a lot of it comes down to due diligence, especially on the people you’re partnering or dealing with.”

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