To well manage the recovery of creditor's rights

Because the current economic situation is severe, the recovery of creditor’s rights of enterprises becomes riskier. It is very important for enterprises to well manage the recovery of creditor’s rights, including to take necessary measures to manage the risks, to take necessary measures to recover debt as soon as possible.

This article intends to provide reference for enterprises to establish a mechanism regarding the recovery of creditor’s rights based on practical experience.

The fundamental logic of such mechanism is that enterprises shall manage the creditor’s rights during the whole procedure, including the risk evaluation before a transaction, risk identification during the transaction, and corresponding measures after the risk comes true. The reason for such logic is that before the transaction, if an enterprise misunderstood the counterparty’s finance ability, or pursued a transaction without the concern of risks, then the creditor’s rights related to such transaction may have potential risks; during the transaction, if an enterprise ignored the agreed clauses, or failed to keep relevant evidence, then the risk related to the recovery would become higher; and when an enterprise encountered difficulties in the process of claim for the creditor’s rights, and it failed to take effective actions, such creditor’s rights may eventually become bad debts.

Then how to take effective measures during the three stages?

Before the transaction, enterprises should pay attention to the counterparty’s business status (including its business scope, performance over the years, etc.), and credit records. In addition, it is also recommended to investigate litigations related to the counterparty, and check whether the counterparty is under an enforcement, or its legal representatives, shareholders, and key persons have been enforced with high consumption restrictions, or been listed as dishonest persons, etc. Those measures could help enterprises to get to know the counterparty’s economic strength, performance capacity and business reputation, based on which, enterprises could set the bottom line of the relevant transactions (e.g., payment terms, liability for breach of contract, etc.).

During the negotiation, enterprises could take advantages of their own position and negotiate for more favorable conditions, which shall be stated in the contracts. Regarding the review of contracts, because this is a complex topic, which will not be gone further in this article.

During the performance of relevant contracts, enterprises shall collect and keep evidence, such as a contract, a statement signed and sealed by the debtor, the logistics vouchers or delivery vouchers, the receipt of goods, the supplementary agreement or memo regarding significant changes of the agreed items, various settlement bills, etc… The form of evidence includes written records, emails, WeChat chat history, letters, etc. In practice, it is recommended for enterprises’ legal department to draft a practical guidance for the business department regarding the evidence list based on different types of contracts.

During the performance of the contract, before the creditor’s rights are recovered, enterprises shall pay attention to the changes in the business conditions of the counterparty. If there is any negative changes, enterprises shall take appropriate measures in a timely manner, such as requiring the counterparty to provide additional guarantees, etc. It is recommended to design a countermeasures and authorization system, in which different departments would get to know when and how to take corresponding measures. Such system would design the countermeasures based on the characteristics of the enterprise’s industry and transaction mode, etc., in addition with the situation of the creditor’s rights. Due to the differences among economic conditions, industries, and transaction modes, the details of such system would not go further in this article.

Finally, it should be noted that the common means for the recovery of the creditor’s rights include sending urging letters, lawyers’ letters, taking preservation measures, applying for arbitration, filing lawsuits, applying for enforcement, applying for ordering the debtor to enter bankruptcy proceedings, etc. As the creditor, enterprises could flexibly choose one or more means. For example, when it is found that the debtor lacks property to be preserved or enforced, the creditor could check whether the debtor has any due claims against a third party, and if so, the creditor could apply for preservation of such claims; or, if the debtor has a large amount of debt, but still has market value, the creditor could urge the debtor to apply for debt restructuring and bankruptcy reorganization.