China Company Owe You Money? A "New" Way to Get It.

China independent contractor

My firm just seized a large sum of money from an Asian company that owed our client a large sum of money for some time. I cannot describe this case here because our international litigation team is still working on it, but it makes for a great example of a little known way to grab money from Chinese companies.

Here is a hypothetical scenario, that is not at all uncommon for companies doing business in China:

1. US company buys product from China supplier.

2. US company sends $1 million to China supplier for order of widgets.

3. Widgets either never come or what does come is clearly not what was ordered.

4. Chinese company refuses to give any refund.

What to do?

Sue the Chinese company in the United States and secure a US judgment? Unless the Chinese company has assets in the United States or in a foreign country that recognizes US judgments, this probably will not make sense. This is because China does not enforce US judgments.

Sue the Chinese company in China? Maybe. There are definitely difficulties with this. First, about 85% of the supply contracts I see between Western and Chinese companies are written in such a way as to be pretty much unenforceable in China, under most circumstances. Second, collecting on a judgment can be very difficult in China.

So what to do? The best solution might be to seize US dollar funds heading to the Chinese company. Let me explain. The Chinese company with which you did business may very well conduct business with companies in Germany, South Korea, Japan, Hong Kong, France, Singapore, or wherever. These companies probably pay the Chinese company in dollars for the widgets they buy from the Chinese company. Let’s take the example of a German company. The German company buys product from the Chinese company and pays the Chinese company in dollars. This means the German company will instruct its German bank to wire dollars to the Chinese company. These dollars will at some point have to go through a US correspondent bank. And when they do, you have the potential to seize them.

New York State Courts will, under certain circumstances, issue orders requiring the various US correspondent banks to “freeze” the dollar funds heading to the Chinese company so as to secure your debt. These orders remain in effect pretty much indefinitely, but service of the court order on the banks must be made every 24 hours, so the trick is to secure your orders before the money hits the United States.

Oftentimes, one must constantly serve such orders before actually succeeding in freezing actual funds. Freezing these funds is neither cheap nor easy, but it can be extremely effective in intercepting money heading to a Chinese company that thought itself exempt from ever having to pay.

10 responses to “China Company Owe You Money? A "New" Way to Get It.”

  1. What recourse does the German company in your example have to recover *its* funds? (And what about the next sucker that comes along?)
    If it’s possible to seize any funds passing through US correspondent banks, how does a company preparing to send funds to China ensure that such a judgment is not outstanding?

  2. Dan:
    You are really onto something here. It sounds very intriguing how one can do this. Procedural wise, it seems very complicated and time sensitive.

  3. Very sharp, I bet they didn’t see that one coming! Should look into whether this kind of thing can be done in HK/Switzerland/UK/the EU.

  4. Dear Sirs:
    I don’t think this way works. Before the money arrived at the Chinese companies’ account, it is still belong to those who pay it. It is still the importers’ money. How can the US court intercept it? .
    Most of the money are prepaid fund. The Chinese company would not dispatch the goods before they get the payment. So it does not help the American companies.

  5. At what point do people say it’s just not worth the risk being on the wrong side of the “China/Foreign” worldview dichotomy in this obviously arbitrary, self-serving “society”? Where instead of spirit of law, there is spirit of the lie?
    As it’s written, sow the wind, reap the whirlwind.

  6. @Shenlawyer – I’m going to take a guess and say that at least for the while it must work this way, otherwise Dan wouldn’t be so gosh-darned pleased with himself about it!
    The law of equity and trusts puts tools within reach of the courts that allow them to do things that would otherwise be out of their grasp, and I’m guessing that’s what we are seeing here. Hell, it seems pretty just to me!

  7. You say the court order is only valid for 24 hours.
    Does this mean you have to renew it every 24 hours? Could get expensive.
    Or do you have some smart way to find out when money is coming in?
    Can the Chinese company find out about the existence of the court order?

  8. Sounds like a good way to get the fund, but does it work in reality? I mean in a budget way. Importer should really think to get the factory audited and the shipment inspected before this kinda thing happened.
    Anway it’s a tough case. I wouldn’t sleep tight if i experienced this.

  9. Forget about court order or renewing order every day. Chinese govt is very strict on their people. China knows if factores/manufacturers start doing bad practices the land of manufacturing will soon be closing every factory door. They take it as a national pride to be servicing country to the world. Also, if people do not get security doing business with Chinese factories, it can jeopardize their economy. China does not have any brand names. They are all about running factories for the world. So, government is very active to solve this kind of issue.
    So here is what you can do. Whenever there is an issue like this whereby you paid but vendor did not send you good products or never shipped anything, go to Chinese Embassy in USA or whichever country you are from and file a complaint. They will not only find the factory owner but they will shoot him too. China wants to prove to the rest of the world that every country can do business with China freely without being worried about getting ripped off.

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