China debt hostage

It has been nearly three years since we did a post on foreigners being held hostage in China. Since our China lawyers still regularly get contacted regarding China hostage situations, that has undoubtedly been too long. To make matters worse, we have recently started hearing of a new and horrific twist. But before I go into that, I will set the typical seen by harkening back to a 2009 post, entitled, China Hostage Situation. Now IS A Good Time To Pay Your Debts.

That post dealt with an email I had received from a trusted reader setting forth the following scenario:

Consumer product company had a rep office – staffed with people with US passports. Company had financial problems and needed to file for bankruptcy. The company sent one of their executives to China to advise their suppliers that they were declaring bankruptcy and would be unable at this point to pay their outstanding balances.

As you can imagine, the Chinese suppliers did not take this well, and they stormed the rep office and are now holding the US citizens hostage – literally. Its been days now -and neither the police nor the embassy will help to extract the people.
The whole thing was obviously not handled properly from the start – but this has turned ugly pretty quickly. Each factory is mainland owned.

I’ll let you know how this turns out – I’m not involved – just hearing most of this second-hand.

I hope to write a happy ending to this story when/if it resolves itself in a safe way that protects both the US people as well as the suppliers – but I am not so sure it will be.

Have you encountered similar experiences?

I responded to that email by saying that my firm has been involved in similar situations countless times and that had we been retained on this one, “our advice would have been so different that I would like to think things would have never reached this point. We would have told this company to get ALL of its personnel out of the country before letting suppliers know (from far far away) about the bankruptcy filing and the upcoming slow payments. That is actually always our first advice (both orally and in writing) whenever a foreign company contacts us for help with their China debt issues.

I then went on and discussed a somewhat similar situation my firm had handled and how I had written on that in a post, entitled, China, We Have A Problem. A Mostly True Story. The key takeaway from that post was the need to get everyone out of town. The situation in that post was as follows:

Young Chinese Child falls from a window in a room in which an American employee of our client is one of the few adults. Child is very badly hurt. Very badly. It now appears the child’s injuries will probably not be permanent, but he also may be in recovery for a year. His medical expenses by US standards were fairly low, but they are astronomical by Chinese standards, particularly for this less than large city. A day later, the parents of the child come with a lawyer to tell this employee that they want six figures (in US dollars, not RMB) from him and from his employer for the injuries that have befallen their child. They also go to the police and make the same request of this employee and his American employer.

The parents make clear to the employee that many in the town are behind them and that things will get much worse if payment is not received. The employer calls us and we immediately spring into action. We determine that the police do not seem to be buying into the parents’ story of guilt, yet they have not told this employee and our client’s other employees that they must remain in town as either witnesses or suspects. We learn that our client is not terribly happy with its joint venture partner in this town and that it has no problem taking its employees out of there and sending them home to sit this whole thing out. Though they feel terrible about the injuries that have befallen the kid, they do not consider themselves responsible. Our research of the facts and the law all indicate our client is not liable. However, as everyone who has ever been involved in litigation anywhere in the world knows, not being liable and not being subject to an expensive and time consuming lawsuit are two entirely different and only tangentially related things.

We determine the best course of action is to get the employees out of this town as quickly as possible and on their way back to the United States. We figure that getting them out will change the leverage game entirely. The employees leave and the settlement amount demanded by the parents immediately plunges. Now we can talk with the child’s parents and  the joint venture partner (who actually owns and maintains the building from which the child fell) from afar, pretty much stripped of any imminent threats. Our client agrees to pay the parents something towards the medical bills and we (fairly publicly) ask that instead of the Chinese joint venture partner paying what it owes to our client, that it instead pay all of that to the family of the injured child. Written agreements in Chinese are signed on all of this and we move on.

If you are a foreign company without a China presence and you owe money to a Chinese company, you do not need to worry about a hostage situation (so long as you never send anyone from your company to China), but you do probably need to worry about Sinosure, and for how to deal with that you should read China Sinosure: What You NEED to Know.

Chinese Law Prof blog did an excellent post on this same topic, entitled, Debt Hostages. That post is on how the police often look the other way (or even assist) with these kidnappings:

When is kidnapping not kidnapping? Apparently when it’s for the purpose of getting a legitimate debt paid. This, at least, seems to be the social understanding of kidnapping in China, and there’s even legal support for it (the law calls it unlawful detention in that case). The latest case is reported in the Dongguan Times: a couple can’t pay the hospital bill for the wife’s delivery of a baby, so the hospital is holding the baby hostage until the parents pay up. They’ve had the baby for over 100 days so far. One amazing thing about it is that this is apparently a government-run hospital, and the hostage-takers have even held a press conference to justify their actions (apparently they felt the father had not been “sincere” in his efforts to pay). The other amazing thing about it (to me) is that this is seen as relatively acceptable. The newspaper report uses quotation marks around the word “hostage,” as if the baby somehow is not really a hostage. And the most a local lawyer can bring himself to call this is “inappropriate.”

The post goes on to note how taking debt hostages just isn’t that big a deal in China and the police even sometimes assist:

I’ve been seeing reports of creditors taking debt hostages for years, and they are always similar in key points: the creditor keeps a human being in forcible detention and demands payment of a debt as a condition for release. What’s more, the hostage-taking and the identity of the kidnapper are not secret; that would defeat the whole purpose. And finally, the police do nothing. They think of it as a civil dispute having nothing to do with them. For example, back in 1992 I read of a case where a jilted suitor took a woman’s baby as hostage for the return of over 1,000 yuan in gifts. The police didn’t immediately arrest this known kidnapper; instead, the go-between, the village committee, and “judicial departments” tried for five months to persuade him to return the child. Only then did they finally give up and arrest him.

Actually, I was wrong to say the police do nothing – sometimes they actively assist in taking debt hostages. In a book entitled One Hundred Strategies for Using Law to Clear Up Debts (运用法律手段清债百策), the writer mentions as an aside that a plaintiff trying to collect a debt asked the police and the procuracy to assist. They helpfully detained three people from the defendant organization for up to eight months, but were unsuccessful in collecting.

So what is the new twist? We are increasingly hearing of situations where someone calls up the partner (with that term so broadly defined as to include a life partner and a business partner and really anyone else who might be relevant) of the hostage and says that if that person pays x dollars (usually ⅓ to ½ of what is actually owed), the hostage will be released. The partner then pays the money and the company owed the debt then claims it never received a yuan of it. Lacking any proof that any money was paid on the debt and without anything in writing actually from the company, the hostage and its partner(s) are right back where they started from in terms of getting the hostage released, but now they are out a good chunk of money.

So what are the takeaways from all of this?

  1. If you are in a debt dispute with a Chinese company and you have people in China, you should try to get them all out of China as quickly as possible.
  2. If you are in a debt dispute with someone in China you should not go to China to try to resolve it.
  3. If you must go to China or if your employee(s) must remain in China, think about using a bodyguard or two and think very carefully about where you or your employee(s) stay and go. Most importantly, be careful with whom you meet.
  4. Consider preemptively suing the alleged creditor somewhere (preferably in US Federal Court) so that you can very plausibly claim to the Chinese police and other authorities that you –or your employee(s) — have been seized and held hostage not because of a debt owed, but out of retaliation for your having sued. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.
  5. Take these situations very seriously and get experienced assistance immediately.
  6. Do not pay money to anyone without a good mechanism in place (and in writing) to ensure that your payment will resolve the debt and immediately lead to a release of the hostage. We typically structure these resolutions where full payment of any settlement amount does not occur until all hostages have been released and are out of China.

What are you seeing out there?

  • Jeng-Ya Chen

    Great list! The second point especially reminds me of Joseph Kahn’s New York Times article, Dispute Leaves U.S. Executive in Chinese Legal Netherworld, where a dispute between Apex and Changhong left one of Apex’s founders, David Ji, stranded in China. Being born in China and having acquired a US passport, Ji felt confident enough to fly to China to try to negotiate financial disputes between the companies, only to be privately detained once there. It’s a good reminder that even if you think you know China, you should probably stick to Mr. Harris’s advice. Better safe than sorry.

  • Kavin Lewis

    Nice Post

  • narsfweasels

    Terrifying. But one wonders… what would happen to a non-Chinese person who held a Chinese person in such a way for non-payment of debt? Would the police be so similarly compliant?