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China Hostage Situation. Now IS A Good Time To Pay Your Debts.

By Dan Harris and Steve Dickinson

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 2 people with US passports. Company had financial problems and needed to file Chapter 11 bankruptcy. The company sent their COO (US citizen) to China to advise their suppliers that they were declaring Chapter 11 and would be unable at this point to pay the $1MM in total outstanding charges. As you can imagine, the Chinese suppliers did not take this well, and they stormed the rep office and are now holding the 3 US citizens hostage - literally. Its been three days now ?and neither the police or 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. Long before that, we represented one of Russia's largest companies, the now defunct Dalmoreprodukt. Dalmoreprodukt was owed a lot of money by a US company, Richardson International 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?

Full post as published by China Law Blog on July 22, 2009 (boomark / email).