How to Deal with Trade Disputes Involving Chinese Offshore Companies

An offshore company refers to an enterprise established by investors outside the offshore jurisdiction in accordance with the company laws of that jurisdiction, but conducts business activities outside that jurisdiction. For the purpose of taking advantage of local preferential policies and evading relevant domestic legal supervision, many Chinese mainland corporate legal persons and natural persons have set up offshore companies in the British Virgin Islands, Cayman Islands, Bermuda, Hong Kong, China, etc., engaging in investment, financing, international trade and other activities.

For foreign international trade buyers, when conducting goods transactions with Chinese offshore companies, they should pay special attention to the issue that the shareholders or affiliated parties behind the Chinese offshore companies may use the offshore companies to isolate risks and evade debts. Once a trade dispute occurs with an offshore company, it is necessary to formulate a response strategy as soon as possible based on existing laws and court precedents.

Be Vigilant Against the Risks of Chinese Offshore Companies

The reason why foreign international trade buyers need to be vigilant in trade with Chinese offshore companies is mainly because the following characteristics of offshore companies add significant risks to transactions and rights protection:

Legal independence: An offshore company is a foreign legal person established in accordance with foreign laws. Even if it is related to Chinese mainland investors, due to its independent status as a foreign legal person, it can block the risks brought to Chinese mainland investors by contract performance.
Weak supervision: The registration process of an offshore company is simple, and the offshore jurisdiction has few restrictions on its shareholder qualifications, registered capital, daily operations, and corporate governance.
Confidentiality of shareholder information: It is often difficult for the public to query the shareholder or director information of an offshore company.
"Shell - like" assets: The registration place and business place of an offshore company are usually separated. Offshore jurisdictions generally prohibit offshore companies from conducting actual business in the registration place. The actual business is usually carried out in the Chinese mainland by the actual controller of the offshore company, and investment or trade is carried out in the name of the offshore company.

Based on the above characteristics, offshore companies generally have no physical assets. Once a trade dispute occurs, the actual controller often abandons the offshore company directly to evade debts, making it difficult for foreign international trade buyers to actually realize their claims even if they win the judicial rights - protection case.

Deal with Trade Disputes Involving Chinese Offshore Companies

In view of the above - mentioned risks of offshore companies, in order to properly deal with trade disputes involving offshore companies, foreign international trade buyers can start from two aspects: seeking the jurisdiction of Chinese courts and pursuing the joint liability of Chinese mainland shareholders or affiliated parties, and do a good job in investigation and data retention during the signing and performance of the contract.

Seek the Jurisdiction of Chinese Courts

For the convenience of dispute resolution and to prevent relevant parties from "slipping away" through offshore companies, when signing trade contracts with offshore companies, foreign international trade buyers had better directly stipulate that Chinese courts or arbitration institutions have jurisdiction and apply Chinese law. If the jurisdiction is not agreed in advance in the trade contract or the jurisdiction agreement is invalid, once a trade dispute occurs between a foreign international trade buyer and an offshore company and a lawsuit is filed against the offshore company, the following two ideas can be adopted to strive for the jurisdiction of Chinese courts over the trade dispute.

I. Seek the jurisdiction of Chinese courts based on the "actual business place" principle

Article 21 of the "Civil Procedure Law of the People's Republic of China" stipulates that a civil lawsuit against a legal person or other organization shall be under the jurisdiction of the people's court in the place where the defendant is domiciled. At the same time, according to Article 3 of the "Interpretation of the Supreme People's Court on the Application of the 'Civil Procedure Law of the People's Republic of China'", the domicile of a legal person or other organization refers to the place where its principal business office is located. Therefore, if the actual business place of an offshore company established by a Chinese enterprise or natural person is within the territory of China, obviously, the place where its principal business office is located, that is, its domicile, is also within the territory of China, so Chinese courts have jurisdiction over this trade dispute. In practice, Chinese courts also adhere to the principle of actively exercising jurisdiction over disputes related to offshore companies whose actual business place is within China. In the "Jurisdiction Objection Case of Loan Dispute between Suntech Power Holdings Co., Ltd. and Suntech Power Investment Co., Ltd.", both the plaintiff and the defendant were companies registered outside China, but their actual business activities and office locations were all within China, and many of their directors and staff also lived within China. Although the first - instance court ruled to reject the plaintiff's lawsuit on the grounds that it was an inconvenient court to hear the case, the second - instance court held that the case involved the interests of China, Chinese citizens, legal persons or other organizations. The first - instance court treated the parties in this case as ordinary foreign enterprises and failed to fully consider the characteristic that the registration place and actual business place of the offshore company were separated. At the same time, there were no major difficulties for Chinese courts in ascertaining facts and applying laws in hearing this case, and it was not more convenient for foreign courts to hear this case. In view of the fact that the property of the defendant available for enforcement was within China and had been subject to preservation measures, it was most conducive to the enforcement of the judgment for Chinese courts to hear the case. The first - instance court's refusal to exercise jurisdiction over this case on the grounds that it was an inconvenient court was insufficient. It can be seen that seeking the jurisdiction of Chinese courts based on the actual business place is more likely to be supported by the court and is a practical way for enterprises to seek the jurisdiction of Chinese courts.

II. Enable Chinese courts to exercise jurisdiction based on the identity of one of the joint defendants being a Chinese enterprise

According to the relevant provisions of the "Civil Procedure Law of the People's Republic of China", as long as a Chinese court has jurisdiction over one of multiple defendants, it has jurisdiction over the entire dispute case. In practice, some creditors first sue the domestic shareholders or other affiliated parties of the debtor offshore company to enable Chinese courts to obtain jurisdiction over the dispute, and then add the offshore company as a joint defendant, requiring both to bear joint liability.

Pursue Joint Liability

Even if Chinese courts have jurisdiction over trade disputes related to offshore companies, many creditors often flinch from judicial rights - protection in China. This is because:

If the offshore company does not respond to the lawsuit voluntarily, there are often obstacles to the extraterritorial service of judicial documents in the litigation process.
Even if the service is unobstructed and the creditor can win the case on the merits, the defendant is likely to have no property available for execution.

In addition, for the purpose of safeguarding the independence of the judicial sovereignty of each country, unless there is a bilateral judicial assistance agreement between the two countries, a traditional practice of mutual recognition and enforcement of each other's judgments, or a multilateral convention on the recognition and enforcement of judgments to which both parties are parties, generally, countries will not recognize and enforce the judgments of courts of other countries in their own country, resulting in a very low probability of successful execution of the judgment overseas.

Do a Good Job in Investigation and Data Retention in Advance

Regardless of which response strategy is adopted, foreign international trade buyers need to plan ahead in daily business exchanges, do a good job in investigation and data retention in advance, and avoid being passive due to insufficient evidence in the event of a trade dispute.

Conduct a full and in - depth investigation of the trading partner before concluding the trade contract.
Ensure that the terms of the trading subject in the trade contract are complete.
Completely retain evidence of the commingling of the offshore company and its affiliated parties during the performance of the trade contract.

If you have a trade dispute with a Chinese offshore company and need legal assistance, please contact our Chinese lawyers in a timely manner. Our Chinese lawyers have rich experience in trade dispute cases involving offshore companies and can help you safeguard your legitimate rights and interests.

Landing Law Offices China