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b. The Corporate Veil, Fraudulent Transfers, and Bankruptcy
The actual enforcement of foreign related arbitration award is a task closely related to other substantive laws in China. The defects in other substantive laws may delay or even stop the enforcement. For example, before China revised its Company Law in 2005, it was fairly common that some major shareholders take unjustified or illegal benefits from the properties of the company, cause tremendous losses to the company, but finally easily walked away due to the lack of the institution of “piercing the corporate veil”.(10) Under the control of such major shareholders, companies suffered huge economic losses but outside creditors may not claim any damages against such shareholders. The enforcement-seeking party may face a hollow “company shell”, but could not recover any money.
Fraudulent transfers are also an issue for enforcement. During or before the enforcement process, the respondent may transfer his properties at an unreasonably low price so as to avoid enforcement. Such transfers are general difficult to discover. The Contract Law of the PRC does provide vehicles for challenging such fraudulent transfers, (11) but it is not known yet how effective these vehicles work in practice.
Bankruptcy is very complicated in China, especially bankruptcy of a state-owned enterprise (hereinafter referred to as “SOE”). Firstly, bankruptcy may be fraudulent. A company may hide or transfer its properties, and file for bankruptcy so as to avoid obligations, including fulfill its obligations under an arbitration award. Secondly, bankruptcy of a SOE may cause extra difficulties for enforcement of arbitration awards. Local government may interfere with the disposal of the enterprise’s properties so as to meet other purpose, e.g. arrangement of employees, payment of taxes and fees, etc. Bankruptcy of a SOE may very often relate to the stability of the society, and it is therefore supervised by the government, whose priority may not cover arbitration awards. Thirdly, under the current bankruptcy laws and policies, some debts may enjoy priority against any other debts, even secured debts. For example, the bankrupt enterprise shall pay all fees and expenses relating to the arrangement of employees, and such payments are made before other debts are paid. Until after that the secured debts may be paid. Arbitration awards are often unsecured and therefore executed even after the other secured debts.
Last but not least, the efficiency and effectiveness of the court’s enforcement work remains to be improved. The Chinese courts have long been criticized for delay and failure in enforcing judgments and arbitration awards. This issue has not been substantially fixed for years.(12)
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