On 13 May 2020, the Supreme People's Court (“SPC”) of the People’s Republic of China (“PRC”) promulgated the Guiding Opinions on Several Issues Concerning Lawful and Proper Handling of Enforcement Cases Related to the Novel Coronavirus Pneumonia Epidemic (“Opinions”).
SPC guiding opinions are important judicial ruling criteria which normally have binding effect in practice for the respective levels of the People’s Courts in the PRC (“People’s Courts”) although such opinions are not law in a technical sense.
The Opinions contain 10 items directed to the People’s Courts on how to deal with certain aspects of judicial enforcement cases concerning the COVID-19 epidemic (“Epidemic”), including but not limited to suspension of the enforcement application period, legal boundaries for seizure measures, disposal of enforcement assets, etc.
The Opinions firstly stress the service and security function of enforcement of civil cases. Accordingly, enforcement in such cases shall be enhanced where the party subject to enforcement is capable of performance and meets the conditions of compulsory enforcement. Legitimate rights and interests of the winning party shall be secured, especially if it is affected by the Epidemic and has difficulties in its business and life. Having secured the rights and interests of the winning party, the People’s Courts shall concurrently mitigate the impact on the rights and interests of the party subject to enforcement as much as possible and shall actively guide the parties to solve the dispute through reconciliation.
The above context of the Opinions prioritizes the winning party’s rights and interests during the enforcement. This makes sense because even under the impact of the Epidemic the winning party shall still be entitled to carry out enforcement to the permitted legal extent. However, the SPC also requires that the People’s Courts should reduce the impact on the party subject to enforcement “as much as possible”. This might lead to difficult situations where the interests of the winning party would have to be “sacrificed” in exchange for a balanced protection of the party subject to enforcement, even if this might go beyond the extent of mandatory law. According to the PRC Civil Procedural Law (“Civil Procedural Law”, latest amended in 31 August 2012 and effective as of 01 January 2013) and the SPC Provisions on Seizure, Detention and Freezing of Assets (“Provisions on Seizure of Assets”, promulgated on 04 November 2004 and effective as of on 01 May 2005), the People’s Courts shall not enforce into necessary living expenses and/or necessaries for life of the party subject to enforcement and its dependent family members. However, enforcement into necessary living premises and life commodities is possible upon application of the creditor as long as the residential premises and common necessaries of life are secured to maintain the lowest living standards of the party subject to enforcement and its dependent family members. Therefore, it will be the duty of the People’s Courts to determine the maximum scale of enforcement necessary to protect the creditor. Despite the special circumstances of the Epidemic, inappropriate overprotection of the party subject to enforcement should be avoided.
The Opinions require the People’s Courts to support a creditor’s plea for suspension of the enforcement application period, if the creditor fails to exercise its claim right during the last six months of the application period due to the Epidemic or related prevention and control measures and pleas for suspension according to Article 27 of the SPC Interpretation on Several Issues Regarding the Application of Enforcement Procedures under the PRC Civil Procedural Law (“Interpretation on Enforcement”). According to Article 27 of the Interpretation on Enforcement, if it is impossible to exercise a creditor’s right due to Force Majeure or any other obstacles during the last six months of the enforcement application period, such period shall be suspended and be resumed from the date on which the grounds for the suspension cease to exist.
This equivalent treatment of “the Epidemic or related prevention and control measures” with “Force Majeure or other obstacles” is in line with the position of the SPC that in general both the Epidemic and respective prevention and control measures may constitute Force Majeure. Such position of the SPC is reflected in the SPC Guiding Opinions (I) on Several Issues Concerning the Proper Trial of Civil Cases Related to the Novel Coronavirus Pneumonia (COVID-19) Epidemic According to the Law promulgated on 16 April 2020 (the “SPC Opinions on Civil Cases Related to COVID-19 (I)”). The burden of proof on the creditor may be mitigated since the creditor may not need to prove that a concrete Epidemic-preventive measure has constituted Force Majeure or an obstacle. However, the creditor must still provide evidence to prove that the Epidemic or a related measure has taken place and it has prevented the creditor from exercising a claim right.
For general information, the application period for civil enforcement under PRC law is two years, commencing from the last day of the performance period stipulated in a legal document (e.g. a judgement) or from the effectiveness of a legal document, if it does not stipulate any performance period.
For more details on the SPC Opinions on Civil Cases Related to COVID-19 (I), please refer to our previous newsletter “PRC Supreme People's Court Announces Guiding Opinions on Trial of Civil Cases concerning COVID-19”.
The Opinions instruct the People’s Courts to apply appropriate seizure measures against the party subject to enforcement which has difficulties in its business or life due to the Epidemic, under the precondition that the realization of the creditor’s right shall not be affected. More specifically in this regard, for instance and without limitation:
a) if the party subject to enforcement has several items of enforceable assets, those assets shall be enforced into which have less impact on the business or life of the party subject to enforcement and are convenient to be enforced;
b) the party subject to enforcement shall be allowed to use its means of production such as factory buildings, machines and equipment, if the continued use of them will not have substantial impact on the value of such assets;
c) the party subject to enforcement may be allowed to use its seized assets to finance the debt repayment during a fixed time period and under the supervision of the People’s Court, if such financing can be agreed by the creditor or the financing income is sufficient to repay the debts;
d) the party subject to enforcement shall in principle be allowed to continue its construction project, if this has been seized.
These guidelines aim at helping business entities resume their operation and the social economy to recover. The SPC requires that illegal or excessive enforcement measures must be avoided in order not to affect the usage of assets and normal operation of enterprises. However, as stipulated by the Opinions, the realization of the creditor’s right has priority. The People’s Courts shall not expand the legal boundaries to overprotect the party subject to enforcement. In case of illegal enforcement measures, a party concerned, or a party of interest may raise an objection to the People’s Court responsible for the enforcement. If the mentioned parties are dissatisfied with a ruling adopted by the responsible People’s Court, they may apply for reconsideration to the People’s Court at the next higher level.
During the Epidemic the SPC promotes online judicial auction for realization of enforced assets due to the transparency and efficiency of such process. Thereby, it also aims at the recovery of the social economy by enabling the creditors to recoup funds and to resume their operation affected by the Epidemic. However, if the party subject to enforcement can sufficiently prove that an auction during the Epidemic would severely decrease the value of its assets, it may apply for postponing or suspension of the auction.
According to the applicable national and local governments’ policies, business entities such as micro- and small-sized enterprises and individual businesses in the service industry that rent State-owned buildings to conduct business operations but encounter difficulties due to the Epidemic were exempted from paying the rentals for three months in the first half of 2020. Landlords of non-State-owned buildings are encouraged to reduce or defer rentals for the mentioned business entities. In line with such benefits, if a tenant has been instructed by the People’s Court to pay the rental directly to a creditor of the landlord while such tenant is entitled to the above-mentioned benefits either according to governmental policies or an agreement with the landlord, the People’s Courts shall support the objection of the tenant against the enforcement of such rental claim at its original full amount; the exempted or reduced part of the rentals shall not be subject to any enforcement measures.
The Opinions state several times that the People’s Courts shall actively guide the parties of enforcement to reach a reconciliation in order to mitigate the economic pressure on the debtors and to enable them to recover their normal business and life affected by the Epidemic. If the parties have reached a reconciliation agreement before the commencement of the Epidemic, but such agreement cannot be timely performed due to the Epidemic, the creditor’s application to restore the enforcement shall not be supported unless the performance of the agreement has become impossible or the delayed performance has led to the contractual purpose not to be fulfilled. The People’s Courts shall further enhance the coordination to promote the function of insolvency reconciliation and reorganization.
Reconciliation during an enforcement process is permitted in Article 230 of the Civil Procedural Law, but on a fully voluntary basis. The People’s Courts shall restore the enforcement procedure, if the creditor has entered into the reconciliation as a result of fraud or coercion, or if a party concerned has failed to perform the reconciliation agreement. Therefore, the Opinions which require the People’s Courts to promote reconciliation might be suspected of influencing the parties’ free decision on voluntary reconciliation. Business entities, being either the creditor or debtor, should bear in mind their legitimate right to reconcile or not with each other and select the most efficient approach to maximize their respective economic interests.
The Opinions further emphasize the punitive function of measures against dishonest conducts and high consumption (the “Punishments”) to crack down on illegal and discredit behaviors such as circumvention from and resistance against enforcement. However, enterprises, which are governmentally acknowledged Key Enterprises Securing Supplies for Epidemic Prevention and Control, shall in principle not be subject to any Punishments due to their special contribution to containing the Epidemic. And a grace period of three months shall in principle be granted to micro-, small- and medium-sized enterprises before any Punishments are adopted against them, if these enterprises have been greatly affected by the Epidemic and therefore have temporary difficulties in their business.
(“Key Enterprises Securing Supplies for Epidemic Prevention and Control” include e.g. manufacturers of medical facial masks, medical protective clothing, goggles and other protective supplies. Such qualification is determined by the competent governmental departments.)
If the party subject to enforcement applies for exemption or reduction of additional penalty interest imposed on the debt that has accrued during the Epidemic (according to Article 253 of the Civil Procedural Law) on the grounds that the delayed payment has been directly caused by the Epidemic or related prevention or control measures, such application shall be supported by the People’s Court after it has affirmed the relevant facts.
Lastly, the Opinions encourage the utilization of modern information technologies, e.g. online auction, online enquiry, online payment, etc., to enhance the supervision and administration of the People’s Courts and to raise the efficiency of enforcement.
The Opinions chronologically follow the previous SPC Opinions on Civil Cases Related to COVID-19 (I), but focus on the aspect of enforcement. They are helpful because they provide an overview and de facto binding rules for the People’s Courts to process enforcement cases under the special circumstances of the Epidemic. Some guidelines have considerable practical significance as they address those new matters based on recent governmental policies to tackle the Epidemic, such as the exemption and reduction of rentals and special benefits for Key Enterprises Securing Supplies for Epidemic Prevention and Control.
However, some other guidelines in the Opinions merely restate the existing provisions under the Civil Procedural Law and the enforcement-related provisions in order to adapt them for the Epidemic-related cases. For example, a greater part of the above item 3 (seizure measures) and item 4 (disposal of assets) can be found already in the SPC Opinions on Further Enhancing the Concept of Benevolent and Civilized Enforcement in the Enforcement Practice, promulgated by the SPC on 16 December 2020, i.e. before the outbreak of the Epidemic.
Furthermore as mentioned above, the protection of the party subject to enforcement and the People’s Courts’ actively guiding the enforcement parties to reconciliation, both stressed in the Opinions, may have the potential to confuse the respective judges and parties involved, so that more legal uncertainty might be created, and cases of misuse or malpractice might occur more easily.
It is, therefore, advisable for parties involved in an enforcement case to know their legitimate rights stipulated in law. Where the law is vague or even silent and allows a discretionary decision of the People’s Courts, the relevant parties should keep sufficient evidence to increase their winning chances. We estimate that more and more civil enforcement cases and disputes related to the Epidemic will arise in the future and it will be interesting to see how the relevant People’s Courts will implement the Opinions in individual cases.