About a year ago, I did a post, entitled, “China Hostage Situation. Now IS A Good Time To Pay Your Debts.” It is time I revisit it.

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 by saying that my firm has been involved in similar situations countless times (at least a half dozen around the world) 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) that you had just filed for bankruptcy and that payment would be slow, at best.”

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 his 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 and they have not told this employee or any other employee of our client that they must remain in town or in China 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 with 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 and our meetings with a cadre of Chinese lawyers we trust 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 connected 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, and it does. The employees leave and the settlement claim by the parents immediately plunges. Now we can talk with all parties (the child, 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. We agree to pay the parents something towards the medical bills and we (fairly publicly) ask that instead of the Chinese joint venture partner paying our client what it owes, that it instead pay all of that to the family of the injured child. Agreements are signed on all of this and we move on.

And yes, before anyone accuses me of this, I will come right out and admit it. The point of this article is that it pays to bring your lawyers in early in a problem, rather than late. Early is better for the attorneys too, but only because many times when it is too late there is nothing the attorney can do (or charge for) beyond saying, “sorry.”

Many years ago, I had a 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. The company CEO 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 to do so. That being the case, we decided the best approach would be for my client to sue the Vietnamese company in US federal 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 my client’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 really 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 later heard through the grapevine that the Vietnamese company had actually been intimidated into inaction by our lawsuit.

I have written in the past, in a post entitled, “Owe Money To A Chinese Company? No Need To Pay, 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….

I am bringing all of this up now after having read an excellent Chinese Law Prof post, entitled, “Debt Hostages.” That post is on how kidnappings in an effort to collect on a debt are illegal in China per the written law, but the police often look the other way:

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.

Not that long ago, we had a client who was taken to a decent hotel, put in a room, and told that he would not be able to leave unless and until his company paid a contested (by us anyway) $60,000 debt. Negotiations reduced the debt, our client paid it, and left the country, never to return.

So what are the lessons from all this

  • If you are in a debt dispute with a Chinese company, think about not going to China at all.
  • If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.
  • Consider preemptively suing the alleged creditor somewhere (preferably in US Federal Court) so that you can very plausibly claim that you have been seized and held hostage not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

Be careful out there…..

  • ehtangen

    The comment regarding “Owe Money To A Chinese Company? No Need To Pay”, “On the other hand, if you have but a small presence in China and you can switch your manufacturing over to some other country…”
    It may appear to some to be counseling “sharp practices” which is not the standard or custom of this blog or its authors. It would be unfortunate if readers interpreted this to suggest that it is acceptable to calculate whether or not you are small enough to cheat another small company in a foreign land.

  • MarkSptizer

    great post as usual!

  • outcast

    Just looking at the scale, is debt kidnapping in China more rampant or less when compared with other countries?
    It seems to me that it is such an uncivilized action to take because of a financial dispute.

  • Jay (a different one)

    Would being a burly 6’6″ 250lb kind of guy improve the situation or make things worse? For example, if one were to simply continue through immigration/customs with various 5’2″ Chinese clinging to arms, legs or back, attempting to kidnap, would that force the police to (positively) take action? What about not letting a locked hotel door stand in the way? Or would that just add a charge for vandalism?

  • We have an old saying in Chinese going like this, 欠债还钱,天经地义。It means there’s nothing more than right to pay what you owe. I hope anyone, whether a Chinese or an American, if owing money to someone else, will try his best to pay it back instead of thinking how to get away with it. These tips might be useful for the business world in reality but it doesn’t sound that right either.

  • John Jules

    Great post. So then I guess the moral of the story is you should not travel to a country where you owe money, unless maybe that country is Switzerland?

  • Thes Quid

    One thing that is related: civil actions against foreigners can result in them being forbidden to leave the country until the case is cleared, or unless they put up bond.
    I was the victim of a spurious lawsuit that resulted in my not being able to leave China for 2 years.

  • Richard-Chinese

    Kidnapping foreigners and out of towner’s is a common business in china. There are Kidnappers for hire on every street. Depending on Kidnap business seasons if they are in low season, they’ll kidnapped kids to be sold into slavery with brick factories and women to be sold to the rural towns as wifes. When is it’s busy season on kidnapping, they target foreigners and out of town businessmen. Even my father in law (chinese citizen) was kidnapped while doing business in another province. Either your family or company pays up or you’ll get your arms and legs chopped off and thrown into the streets as beggars working for the mob the rest of your life. To validate my views ask around people that taken tours in china and ask how many handless and legless beggars they saw while going through dozens of cities in china. These beggars are station there targeting foreigners with sympathy. The mob would pay the local police a cut of the earnings from these beggars which mostly include gamblers that couldn’t pay their debt and kidnapped victims with their tongues cut off and arms/legs cutoff. Only when news makes headlines that local police act on it. Which usually involves picking a random person to take the wrap and admin guilt on writing then killed themselves via jumping off a building or hanging themselves to end the news headline. An example would be like those headline poison milk and tooth paste manufacturers in china. And another fine example of the local police in china at work is the perpetrator that jump off the building to take the wrap for stabbing a foreign women to death in shanghai that made headlines. In short your american citizen status don’t mean anything to these foreign countries, when you step foot in it you are sheeps/victims asking to be robbed / kidnapped.

  • Don’tFwithMe

    And what options are on the table here in the U.S. if a Chinese company is not paying their debts. They come to the U.S. every January, but a lawsuit there or here will not prompt them to do what is right. (Not looking for answers that say just forget it.) I truly liked most of the people I’ve met with this company and in China in general, but now one of them thinks he can re-write the terms of our contracts after I have done all the work. There are consequences if you mess with the wrong person. Any ideas? How to best ‘make them an offer they can’t refuse”?