Just got an email from a regular and very much trusted reader. The email (with all identifiers removed) is as follows:

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?

Oh yes we have. Many times. But if we had been retained, our advise 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) that you had just filed for bankruptcy and that payment would be slow, at best.

We did have a client quite recently in a similar situation, which we wrote about in our post, “China, We Have A Problem. A Mostly True Story. The key takeaway from that post is that the very first thing we emphasized was the need to get everyone out of town.

Many years ago, I had a similar situation where our client was alleged to owe money to a Vietnamese company. The Vietnamese company had shipped product to our client which we contended was defective and for which my client refused to pay. My client absolutely had to go to Vietnam to meet with other clients and he and I were both very concerned about what might happen to him there. My advice was that he not go, but he insisted that he had too. That being the case, we decided the best approach would be for my client to sue the Vietnamese company in a US court, alleging the Vietnamese company owed my client money for defective product. Our thinking was this might help insulate the client from problems in Vietnam. If the Vietnamese company tried to have my client imprisoned for his company’s alleged debt, we would at least be able to point out that there was an ongoing dispute between the two companies and that the Vietnamese company was seeking to act against my client in Vietnam not to collect on an unpaid debt, but in retaliation for my client having sued. My client went to Vietnam without incident and a few months later we were able to settle all claims. We heard through the grapevine that the Vietnamese company had actually been intimidated into inaction by our lawsuit.

About a week ago, I wrote a post, with the somewhat tongue in cheek title, “Owe Money To A Chinese Company? No Need To Pay. It was on how foreign companies need not worry much about Chinese companies pursuing them overseas for unpaid debt. The gist of the post was that if you need to prioritize who to pay, you should put your Chinese creditors last. Even so, I stressed that this equation applies only if you do not have a “real presence” in China:

This is not to say, however, that foreign companies that do not pay may not face repercussions other than a law suit. For example, if you are a foreign company with a real presence in China, not paying a Chinese company might end up causing you real problems in China and you must consider this before choosing not to pay. Just by way of example, we represent a large Chinese manufacturer in an industry where there are only around five companies capable of manufacturing this particular product. Our Chinese client is owed millions by a US company and that US company figured it would not need to pay. What this US company did not figure was that our client would alert the other manufacturers of the non-payment and now none of those manufacturers will make product for this US company either. Once the US company started running out of product, it started paying our client again. On the other hand, if you have but a small presence in China and you can switch your manufacturing over to some other country….

So what should this company do now? I guess my advice would be to negotiate to get these people out of there as quickly and as cheaply as possible.

What do you think?

Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.

  • ceh

    Unless this is office is out in the sticks, far and away from any major cities, I would think that if the Company talks to the right authorities, this can get resolved quickly. Say what you will about China, ransoming people over commercial disputes just isn’t allowed (unless you’re the government…). There’s no way anyone is going in with suitcases of cash (assuming they had the money), as getting the authorities and embassy to take care of the situation should be a lot faster (and cheaper).
    Note that I read “mainland owned” to mean owned by mainlanders, not mainland PRC gov’t. If your reader meant the latter, well, good luck kids.

  • Chredwa

    This is what I dont understand….why wont the police or the embassy get involved. This is clearly against the law to hold someone else captive. I have been in much less, but similary dispute at a restaurant over a payment of a bill. We called the police (yes, it got to that point…we were right), but they did nothing. Of course we did not call the embassy. In the end, we had to call a Chinese friend/business owner from the neighborhood. Within one minute of him showing up our case was solved in our favour.
    By why wont the embassy help? Can anyone explain?

  • Schwartzenegger

    What about if the U.S. government defaults on its debt to the Chinese government, or debases the U.S. dollar? Should the U.S. embassy staff “clear out”? What about a California State trade office in China?

  • Whatever the reason for holding US citizens. I’m surprised the US Embassy haven’t been more active at securing the release of the people.
    I hope you’ll keep us informed…

  • James G

    This sort of thing is puzzling – not so much the kidnapping, but that the embasssy refuses to get involved. When consular workers are kidnapped, that’s big news. When foreign citizens go missing under mysterious circumstances, that is news too. Especially if the foreign citizens are “photgenic”… but for some reason, despite all the hype over China scandals both real and imagined, the kidnappings aren’t reported on.
    The link above is to a very eye-opening post about functionaries of a Chinese SOE reportedly involved in a kidnapping.
    The reason that everyone believes the US, or UK, French, etc, governments will intervene is because the many cases where they don’t intervene are swept under the rug. $$$ dictates that everyone involved play nice, hush up, and meanwhile, any semblance of sanity goes out the window when incidents like this happen. And believe me, they do happen.
    Your government doesn’t have your best interests at heart, full stop. Often times, it takes a lot of work to get them to do more than make a few phone calls in cases like this.

  • robert

    Agree with James 100%. People who think that their embassy/consulate is there to save them have obviously not had much experience working with their embassy/consulate.

  • Jay Casey

    These unlawful detainment cases happen everyday in China but we rarely read about them because the Chinese media certainly isn’t going to write about it and also because foreign corporations don’t want to rock the boat and upset the Chinese authorities out of fear of retribution at a later date.
    The US embassy and consulates always get involved if asked to do so by the US citizen or corporation. However, all they can do is request and then demand that the PSB does its job. These requests are often ignored by the PSB and local authorities because they know that there is little the foreign governments can realistically do. The foreign consulates step by step raise the matter to higher and higher authorities in China but the Chinese know how to play “rope-a-dope” and by the time the matter gets to Beijing the local Chinese company has gotten what it wanted. The foreign embassy carries out their actions quietly so they always get accused of “doing nothing”. If they issued a press release over every incident like this (weekly) they would soon lose what little clout they have with Chinese authorities.
    Foreigners always seem to think their embassy can send in the troops or show up and demand justice from the PSB or the thugs but diplomacy does not work that way. All they have to do is ask themselves how they would react if Chinese embassy personnel showed up on scene and tried to tell the Chicago Police (or whichever countries’ police) what to do with a case involving a Chinese citizen. It doesn’t work any better in China.
    I agree with the web author – if in a dispute, get out of China ASAP. Even the Chinese govt will often stop a foreigner from leaving China if they are involved in a civil case filed by a Chinese company.

  • This is quite incredible. How can anyone have faith in the protection of the law when doing business in China when hostage-taking is tolerated as a valid bargaining strategy?
    Stern Hu is probably asking the same question.

  • BRT

    Reminds me of a situation in Ningbo a few years back, where the US owner sent his 22 yr old son on buying trip to China, and was basically “kidnapped” for 5 days in a Ningbo hotel by a group of “workers” of an unpaid supplier. The workers stayed with the kid in the same room and in room next door while sides negotiated. Ningbo police basically treated it a commercial dispute between two parties and surmised the kid was not being held against his will (which was kinda a joke), Shanghai US consulate contacted and wrote letters to Ningbo PSB, to no avail, 5 members of global leading security company kept the kid under surveilance for 5 days but were not able to extract him. Finally, came down to standoff in the lobby where the security team finally tried to remove him and confrontation ensued – police were again called in and things got complicated and bogged down again. PSB were sympathetic to the Chinese supplier and again did nothing. Bottom line is the kid’s owner paid the money owed by TT and the kid was let go. Not so much that the consulate would not get involved, but more the fact they were powerless to do anything.

  • ceh

    So the question is, what if they CAN’T pay? If you’re talking about 6-7 figures owed, an insolvent company, and non-loaded families, a cash solution doesn’t exist. Last I checked, you can’t lift the automatic stay to pay unsecured creditor ransom demands. How long before the thugs get frustrated and leave? Do they leave after breaking some kneecaps?

  • James G

    Keep in mind that “money owed” doesn’t signify the same thing in different places. You don’t kidnap (which is quite different than imprison, the state imprisons, shady businessmen imprison) and then claim that you would like to talk this over.
    Or, in a dispute, if there are laws on the books concerning the handling of payment disputes, then why would someone be held against their will in this manner? Yes, I know that these laws might be toothless, but… Furthermore, often times the people involved in such disputes aren’t being held by the PSB, they are being held by “employees” of private or SOE firms. There is NO WAY that any company in the U.S. would be allowed to kidnap a Chinese national, hold him in a room at the Doubletree out by the airport, while all the while the local police force (to say nothing of state and federal agencies) sat on their rumps doing nothing.
    I don’t have nearly as many good stories as Dan seems to, but here is this: several years ago a Chinese company in Sh was having an internal dispute; ownership percentages were being called into question, debts discussed, etc. The dispute became bitter, so what happened, did they take it to court? No, a few guys showed up, thick-necked and clad in all black. They spend every minute of the next two weeks or so camped out in a room off the main lobby, just in case they had to “struggle” with unwanted visitors. They didn’t talk to us, they just… played cards or whatever, while everyone else got on the with SOP. Every now and then I’d peek in at them, but they hardly seemed up for a little chat with 外友.What became of the dispute I will never know, I was just lucky to have been clued in by some of the Chinese staff, who managed to get some info off the grapevine. A few years later, the company collapsed and one owner fled overseas with the money. So it goes.
    Sometimes, this is how money disputes are handled between Chinese companies. We should all hope that these sort of disputes move to the courtroom and rely less on muscle and intimidation.

  • The attitude of both the PSB and the embassy is likely to be that if you can make the problem go away by paying $X then just pay $X so that they don’t have to worry about the problem. You have some overworked bureaucrats that would like problems to just go away.
    Besides what do you expect the police to do? Send in a SWAT team and start shooting people? Remember that once you leave you are never coming back, whereas the people that are holding you are people that the police are going to have to deal with for years to come.
    Also if you really don’t have the money, then what happens next is likely to be some hard negotiation. Obviously you have some cash or else what are you paying the workers with.
    The other thing is that ironically the fact that you do have police and embassy staff makes this sort of thing more effective. The danger in making payments is that you pay the money, but something bad happens anyway. The fact that the hostage takers will get into serious trouble if they don’t release the hostages after the money is paid, and if they actually seriously harm the hostages, makes this a much more effective strategy.
    Contrast to Russia and Nigeria were people get kidnapped when there isn’t a preexisting debt.
    Finally, I don’t think this sort of thing is a large part of the Stern Hu case. If you are taking hostages to get an unpaid debt, then you want to keep this as quiet as you possibly can. You are after the money, and you want to avoid making the person paying them money lose face because that makes it more difficult for them to pay.
    If someone in the Chinese government really wanted to squeeze Rio Tinto, then there are about a dozen things that they could have done to do it quickly and quietly. The fact that they were being loud means that either someone seriously miscalculated or else there is something else to the story.
    The other thing is that Chinese companies are targets of this sort of thing also. Why do you think that SOE’s are so worried about paying workers, and what do you think is behind the tens of thousands of “mass incidents” that get reported each year?

  • One other thing, when a Chinese factory owner has to close a factory often what happens is that they don’t go through any formal bankruptcy. They just lock the factory gates and leave town.
    This thread should make it more obvious why they do this.

  • Matthew A. Sawtell

    Hate to say it folks, but stories like this, whether it be in China, France, or elsewhere are going to be cropping up for the next few years as the “global economy” roils in contractions and consolidations. The real story will be if anyone is killed during these situations – to which, depending which countries are involved, the question of “gunboat diplomacy” come back into vogue.

  • Charles Liu

    There’s a flip side of the story – many Chinese suppliers have been stiffed by customer overseas (often overseas Chinese) who takes the goods but don’t pay. Collecting in US is nearly impossible, so they feel they must do what they can.
    A PCB supplyer once shared a 007 style collection story: After check bounced from a reputable Taiwanese customer and finding their office emptied, they went to the guys residence, bribe the security guard to get in, and finding the guy packing up. Got cash and check payment from confrontation but bank account just closed. Ran to the airport to stop the guy from getting on the plane, only to be a step too slow.

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    The other day, in a post entitled, “China Hostage Situation. Now IS A Good Time To Pay Your Debts,” I wrote about some U.S. executives who were being held hostage in China over nonpayment of a business debt. Their US based company had gone bankrupt and…

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  • Jeff Gandy

    After reading about Chip Starnes being held north of Beijing I could not help but think of your previous posts on this type of situation. Too bad they never read your blog 🙂 http://www.chinadaily.com.cn/china/2013-06/25/content_16655733.htm