On November 8 2016, the Supreme People's Court (the “SPC”) issued the Provision of the Supreme People's Court on Several Issues Relating to Handling of Property Preservation Cases by People's Courts (the “Provision”) which shall become effective as of December 1 2016.

According to the previous legal practice in China, the property preservation is difficult to be executed due to the excessively high requirements on the application of the preservation, the discrepant criteria of the judgement, the improper executions, etc. Under such circumstances, on one hand, it becomes quite easy for the debtors to conceal or transfer their property before or during the process of dispute resolution. On the other hand, if any malicious preservation occurs, the debtors’ legitimate rights cannot be protected properly.

Targeting such problems, the Provision, consisting of 29 articles, aims to deepen the reform of the preservation related rules and standards. Among others, the main contents thereof include the following aspects:

1. The Limitation of the Guarantee Amount for the Preservation Application

Subject to Article 5 of the Provision, where the court adopting the preservation measures orders the applicant to provide the guarantee, the guarantee amount shall not exceed 30% of the preservation amount requested; where the property to be preserved is a disputed subject matter, the guarantee amount shall not exceed 30% of the value of such disputed subject matter.

Comments:

Subject to the Civil Procedure Law of People’s Republic of China, where the court adopts the preservation and the applicant does not provide the guarantee according to the court’s order, the application will be rejected by the court. However, there was no standard for the guarantee amount which results in the different requirements by the courts. As a result, the court ordering a relatively high guarantee amount, or even in full amount of the property, may tremendously increase the burden of the applicant, even causing the failure of the preservation. Therefore, the explicit guarantee amount will immensely promote the execution of the preservation measures and protect the legitimate interest of the relevant applicant.

2. Property Preservation Liability Insurance

Subject to Article 7 of the Provision, where an insurer provides the guarantee for property preservation in the form of a property preservation liability insurance contract concluded with the applicant for property preservation, it shall provide a letter of guarantee to the court. The letter of guarantee shall state that the insurer shall compensate the losses suffered by the respondent arising from the incorrect application of property preservation, and attach the relevant evidential materials.

Comments:

In practice, even though the property preservation liability insurance was generated years ago, due to the lack of legislative foundation, the application of such insurance is difficult. The Provision, for the first time, confirms formally the legitimacy of the property preservation liability insurance, which will definitely promote the preservation capacity of the involved parties.

3. Guarantee for Property Preservation Provided by the Financial Institutions

Subject to Article 8 of the Provision, where a qualified financial institution provides the guarantee for the applicant’s property preservation in the form of an independent guarantee letter, the court shall allow such guarantee.

Comment:

Such regulation may provide more alternatives for the applicant of property preservation to reduce the burden of cash. However, it shall be taken into consideration that the applicant shall make payment to the financial institution to get the guarantee for property preservation. If the amount is high, it will definitely become another barrier for the applicant to apply for the property preservation. Therefore, the operability of this regulation is unclear and more specific rules shall be issued by the legislative authorities.

4. Exempting of Guarantee for Property Preservation

Subject to Article 9 of the Provision, where one party involved in a lawsuit applies for the property preservation, under any of the following circumstances, the court may not require the guarantee:
1) recovery of alimony, maintenance expenses, tending expenses, pension, medical expenses, labor remuneration, employment injury compensation, and traffic accident personal injury compensation;
2) the party involved suffers domestic violence in a marital or familial dispute case, and has financial difficulties;
3) a public interest lawsuit filed by a procuratorate which involves compensation for damages;
4) the party involved claims compensation for the damages caused by his/her courageous act;
5) where the facts of the case are clear and the rights and obligations are specific, thus there is relatively slim possibility of incorrect application of property preservation; or
6) the applicant is a financial institution with independent solvency (established with approval from the financial regulatory authorities), such as a commercial bank, an insurance company and its branches.

Meanwhile, after a judgement or a verdict has taken effect, and prior to commencement of enforcement procedures, where the creditor applies for the property preservation, the court may not require the creditor to provide the guarantee.

5. Property Enquiry through Online Enforcement Monitoring System

Subject to Article 10.2 of the Provision, where one party applying for the property preservation is unable to provide specific information of the property to be preserved due to objective reasons, however, if this party has provided specific clues of the property, the property preservation application shall be adopted by the court.

Subject to Article 11 of the Provision, where a court has ruled on property preservation pursuant to Article 10.2 of the Provision, during the enforcement process, the applicant may submit a written application to the enforcing court which has established an online enforcement monitoring system (the “System”), in order to enquire about the property of the respondent through the System. Where the applicant submits an application for enquiry, the enforcing court may make use of the System to enquire about the property to be preserved pursuant to the ruling, or the property within the scope of the preservation amount, and adopt the corresponding measures of seizure, confiscation and freezing. Where the court does not find any property available for preservation through the System, it shall notify the applicant in writing.

Comments:

The application of the System may help to acquire the property status of the respondent rapidly and efficiently, better avoiding the concealing or transferring of relevant property in dispute. Meanwhile, the Provision also regulates the corresponding rules to balance the benefit of the involved parties, such as the confidential obligations of the court, the application conditions for the applicant, the preservation remedy measures, etc.

6. Protection of the Debtor’s Interest

Subject to Article 13 of the Provision, where the party subject to the preservation has multiple properties available for the preservation, subject to the prerequisite of fulfilling the purpose of preservation, the court shall choose to preserve the property which has relatively smaller impact on the manufacturing and business operation of such party. Where a court carries out the preservation of property used for the manufacturing and business operation (such as factory, machinery or equipment) and appoints the party subject to the preservation to safely keep the property, the party subject to the preservation shall be allowed to continue to use such property.

Subject to Article 15 of the Provision, a court shall adopt the corresponding seizure, confiscation and freezing measures based on the ruling for property preservation. Where the overall value of immovable available for preservation, such as lands and buildings, is evidently higher than the amount stated in the ruling for preservation, the court shall adopt seizure, confiscation and freezing measures for the corresponding value of the said immovable, except that the immovable is indivisible for usage, or division thereof will seriously compromise the value of the immovable. Where the funds in a bank account shall be frozen, the court shall specify the concrete amount which will be frozen.

7. Lifting of Property Preservation

Subject to Article 23 of the Provision, where a court has adopted property preservation measures, under any of the following circumstances, the applicant shall promptly apply for the lifting of property preservation:

1) it has not filed a lawsuit or applied for arbitration pursuant to the relevant laws within 30 days after the adoption of pre-trial property preservation measures;
2) the arbitration commission does not accept the application for arbitration, or allows for withdrawal of the application of arbitration;
3) the application or request for arbitration is rejected by the arbitration award;
4) other court does not accept the lawsuit, or allows for withdrawal of lawsuit;
5) the lawsuit or litigation request is rejected by a valid judgment of another court; or
6) any other condition where the applicant for property preservation should apply for lifting of property preservation.

Upon receipt of an application for lifting of property preservation, the court shall rule on lifting of property preservation within five days. However, under urgent circumstances, the court shall rule on lifting of property preservation within 48 hours.

Where the applicant for property preservation fails to apply to the court promptly for lifting of property preservation, the applicant for property preservation shall compensate the party subject to preservation for losses suffered due to the property preservation.

Where the party subject to preservation applies for lifting of property preservation, and the court upon examination concludes that the application is legal, the court shall rule on lifting of property preservation within the aforesaid period.

Comments:

In the previous practice, the applicant may postpone the lifting of property preservation maliciously. Under the new rules in the Provision, the applicant shall lift the property preservation in a timely manner, otherwise, liability of compensation will arise. Such regulation will reasonably allocate the responsibility of property preservation, and efficiently solve the malicious extension of property preservation.