Investment and disposal of non-performing (risky) assets -- preservation and enforcement of debtor's claims

In the disposal of non-performing assets, it is often found that the debtor has external claims that can be preserved and enforced.

1. Relevant legal provisions

<中华人民共和国民事诉讼法>Interpretation of the Supreme People's Court on Application (2022)

Article 159 Where the debtor's property cannot satisfy the request for preservation, but it has a due creditor's right against another person, the people's court may, on the basis of the creditor's application, rule that the other person shall not repay the debtor in the case. Where the other person demands compensation, the people's court is to deposit the property or price.

Article 499 The people's court may make a ruling to freeze the creditor's rights of the person subject to enforcement when it enforces the due creditor's rights of another person, and notify the other person to perform it to the person applying for enforcement. Where the other party has an objection to the due creditor's rights, and the applicant for enforcement requests that the objection be partially enforced, the people's court will not support it. Where interested parties have objections to the due creditor's rights, the people's court shall handle it in accordance with article 234 of the Civil Procedure Law.

Several Opinions of the Supreme People's Court on Lawful Sanctions for Evading Enforcement

Preserve the unexpired creditor's rights of the person subject to enforcement in accordance with law. The enforcing court may freeze the unexpired creditor's rights of the person subject to enforcement in accordance with law, and after the creditor's rights expire, they shall be enforced with reference to the due creditor's rights. If a third party raises an objection only on the ground that the debt is not due, it does not affect the preservation of the creditor's right.

Provisions of the Supreme People's Court on Several Issues Concerning the Enforcement Work of the People's Courts (Provisional)

Article 45 Where the person subject to enforcement is unable to pay off the debts, but has a due creditor's right against a third party other than the case, the people's court may, upon the application of the person applying for enforcement or the person subject to enforcement, issue a notice of performance of the due debt to the third party (hereinafter referred to as the notice of performance). The notice of performance must be served directly on the third party.

Reply of the Supreme People's Court to the Request for Instructions on How to Deal with Issues Concerning the Objection Raised by a Third Party Beyond the Statutory Time Limit in the Enforcement of Mature Creditor's Rights

If the third party fails to file a complaint within the statutory time limit after receiving the notice of performance of the due debt, it does not have the effect of substantive law recognizing the existence of the debt. Where the third party still has objections after the court has begun compulsory enforcement, they shall receive judicial relief.

From the above-mentioned legal rules, it can be seen that the people's court may freeze the debtor's due or unexpired creditor's rights if the remaining amount of preservation is retained. In the enforcement procedure, if the person subject to enforcement is unable to pay off the debt, it may enforce the debtor's due creditor's rights against the third party but must be directly served to the third party performing the debt, and the third party may raise an objection within the time limit, and if the objection is not raised within the time limit, the substantive rights will not be lost; When freezing the unexpired creditor's rights, if a third party raises an objection to freezing on the grounds that the claims are not due, the court should not support them, and it should be noted that the unexpired creditor's rights can be frozen but not enforced, and can only be enforced after the creditor's rights expire.

Second, practical analysis

(1) The initiation stage of creditor's rights preservation

As a type of property, the rules of property preservation shall apply. The above-mentioned rules do not limit the period for filing a claim preservation, and in this regard, the plaintiff or the applicant for enforcement may file an application for preservation before, during and during the enforcement procedure, and the specific procedures shall be carried out in accordance with the general property preservation procedures.

Creditor's rights belong to the category of property, but they are different from ordinary property, and the general view is that in the property preservation of creditor's rights, the court freezes the abstract creditor's rights and debts, and in this regard, the court must not only make a ruling to freeze the creditor's rights, but also send a notice of debt performance to the debtor who freezes the creditor's rights (hereinafter referred to as the third party) and specify the time limit for objection.

(2) Requirements for creditor's rights for property preservation

1. Can unexpired claims be preserved?

(2015) Zhi Fu Zi No. 36 Enforcement Ruling pointed out that the effect of the preservation of due creditor's rights is only to require others not to repay the debtor, and does not involve the determination of the entity of the creditor's rights and debts, nor does it restrict the property rights of others. Therefore, even if the creditor's right is not due, or if there is a dispute over the amount of the creditor's right, it does not affect the people's court to take preservation measures against the relevant creditor's right in accordance with the law.

(2018) Supreme Court Zhi Jian No. 664 held that if the judgment debtor's claim against a third party has not yet matured, in order to prevent the judgment debtor from transferring property and harming the legitimate rights and interests of the applicant for enforcement after accepting the third party's repayment, the people's court may take freezing measures against the unexpired creditor's rights to restrict the third party from paying the unexpired creditor's rights to the person subject to enforcement, but at the same time, it may not require the third party to pay the unexpired creditor's rights to the applicant for enforcement, so as to protect the legitimate interests of the third party. This is the same as freezing the judgment debtor's due creditor's rights against a third party, and is in line with the characteristics of unexpired creditor's rights, does not harm the rights and interests of the third party, and is also in line with the general practice of enforcement judicial practice.

2. Can the disputed claims be preserved?

(2018) SPC Zhijian No. 70 held that as far as the content of Article 13 of the Opinions on Sanctions Evasion Enforcement is concerned, it emphasizes that if a third party only raises an objection on the ground that the debt is not due, it will not affect the preservation of the creditor's right, but in this case, the reason for the unfinished performance of the contract and the unsettled project asserted by the First Hospital is actually an objection to substantive issues such as whether the creditor-debtor relationship ultimately exists and the amount of the creditor's right, rather than only claiming that the creditor's right is not due. Therefore, Hongda Weiye Company cannot advocate for continuing to take enforcement measures against the disputed creditor's rights in accordance with Article 13 of the Opinions on Sanctions Evasion Enforcement.

3. Can the preserved creditor's rights penetrate in multiple layers?

(2018) Zhe 0226 Zhiyi No. 2 held that in order to preserve the respondent's due claims against a third party, there is a view that the substantive preservation is a creditor-debtor relationship, not the property of the third party (as long as the third party does not perform the repayment of the respondent); If the third party's due creditor's rights against others are preserved, the "penetration" is a bit too deep, and the subrogation may not be able to go so far.

From the above cases, it can be seen that property preservation measures can be taken for unexpired creditor's rights; Property preservation measures may also be taken for claims where the amount is disputed, and in terms of specific claims, only the claims of the person subject to enforcement can be preserved, and no further penetration can be carried out. It should be noted that the premise of a dispute over amount is that the existence of a claim is recognized and a part of the amount of the claim is admitted, and if the claim is accompanied by an effective element and the effective element has not arisen, the essence is a denial of the claim rather than the amount, and property preservation is not allowed.

(3) Objections to the preservation and enforcement of creditor's rights

1. Does the third-party objection affect the enforcement of the creditor's right?

As mentioned in the above-mentioned (2018) SPC Zhi Jian No. 70 case, if a third party raises an objection to deny the creditor's right on the ground that the creditor's right does not exist or the conditions attached to the creditor's right are not fulfilled, the court shall not take preservation measures or enforcement measures against the creditor's right;

Where a third party raises an objection to the preservation of the creditor's rights on the grounds that the creditor's rights are not due, it does not affect the court's preservation of the creditor's rights, but if an objection is raised to the enforcement of compulsory performance, the court shall not require the third party to enforce the performance;

The third party's objection on the grounds that there is a dispute over the amount of the creditor's right (non-denial of the creditor's right) or that there is an encumbrance on the creditor's right (such as a pledge) does not affect the court's preservation and enforcement of the creditor's right.

2. Whether the acquiescence in the third-party litigation preservation stage represents the recognition of the enforcement of the creditor's rights

(2022) Supreme Court Zhi Jian No. 1 held that in the course of litigation, the essence of freezing the due creditor's rights with a third party is to freeze the abstract creditor-debtor relationship, rather than directly freezing the property owned or controlled by the third party. In this case, the third party only needs to perform the negative obligation of omission, and its property will not be disposed of, so the third party's recognition or non-denial of the due creditor's right at the litigation stage does not indicate that the third party recognizes the enforcement court's enforcement measures against the due creditor's right accordingly.

(2019) Hu 01 Zhiyi No. 126 held that with regard to the third party's defense that "the debts between the debtor and the third party have not been liquidated, the amount of the claims is unknown, they do not meet the statutory conditions for the maturity of the claims, and the claims have been transferred before the preservation is frozen", the court held that it was not improper to take preservation and freezing measures against the respondent's due claims from the third party, which was not a dispositional measure to order performance.

(2015) Zhi Fu Zi No. 15 Enforcement Ruling pointed out that: "From the perspective of a third party, raising an enforcement objection in the enforcement procedure is both a statutory right and an expected right. The enforcing court cannot infer that the due creditor's right enjoyed by the person subject to enforcement against the third party is truly established because the third party has not filed a reconsideration of the preserved due creditor's right at the litigation stage. ”

From the above cases, it can be seen that the failure of the third party to raise an objection to the preservation act in the litigation procedure is not equivalent to the recognition of the preserved creditor's right, and it may subsequently raise an objection at the enforcement stage.

3. Whether the third party's failure to raise an objection within the time limit has the effect of confirming the substantive rights of the creditor's rights

(2019) Supreme Court Zhi Jian No. 124 held that, according to Article 501 of the Interpretation of the Civil Procedure Law, if a third party raises an objection to the due creditor's rights, and the applicant for enforcement requests enforcement to enforce the objection partially, the court will not support it. This is because, for the creditor-debtor relationship that has not been determined by an effective legal instrument, based on the protection of the substantive rights of a third party, the existence of the creditor's right and its specific amount may not be directly examined and confirmed in the enforcement procedure. The above issues should be confirmed through the litigation process.

(2018) Supreme Court Zhifu No. 83 held that the focus of this case is how to deal with the objection raised by a third party after receiving a notice of performance of a due debt in the enforcement procedure of the people's court. Although article 65 of the Enforcement Provisions stipulates that "if a third party fails to raise an objection within the time limit specified in the notice of performance and fails to perform, the enforcing court has the right to rule on its enforcement", the above provisions do not mean that if the third party fails to raise an objection within the time limit, the substantive law effect of recognizing the existence of the debt will occur. Therefore, if a third party raises an objection to the non-existence of a due debt after receiving the notice of performance of the due debt within the time limit, it shall, in accordance with article 225 of the Civil Procedure Law, conduct a substantive examination of the existence of the due debt and the specific amount of the due creditor's right.

(2021) Hei Zhi Fu No. 85 held that in the case of a substantive trial without trial procedures, the direct enforcement of the judgment debtor's due claims against a third party is in principle required for the third party to recognize the due claims. If the third party fails to raise an objection within the time limit for the performance of the due debt notice and fails to perform, it will lose the procedural interest of exemption from enforcement, and the people's court may rule to enforce it. During enforcement, if a third party raises a defense on whether the period for performing the debt has expired, whether the amount of the creditor's right is determined, etc., the people's court shall conduct a substantive review.

From the above cases, it can be seen that the court's compulsory ruling to enforce the third party's debt to the debtor is only a procedural ruling, and does not have the legal effect of confirming the third party's debt. If the third party does not raise an objection after the issuance of the ruling on the preservation of the creditor's rights, it may raise an objection at the stage of enforcement of the creditor's rights, and the court shall not find that the third party has approved the creditor's right on the ground that it has not raised an objection to the preservation.

(4) Can the applicant for enforcement enforce the objection lawsuit against the court for refusing to enforce the third creditor's right?

The First Civil Division of the Supreme People's Court stated in Civil Trial Guidance and Reference, Volume 2, 2022 (Volume 90), People's Court Press, 2022 Edition, pp. 240-244: Where a people's court enforces the debtor's due creditor's rights against another person, and the other person has an objection to the due creditor's rights, and the applicant for enforcement requests to enforce the objection partially, the people's court will not support it. The person applying for enforcement may separately file a subrogation lawsuit, that is, request the people's court to subrogate the judgment debtor's claim against another person in his own name, or request the person subject to enforcement to claim the creditor's right against others. The people's court shall not accept the objection lawsuit filed by the applicant for enforcement; where it has already been accepted, the lawsuit shall be rejected.

(5) Preservation and enforcement of special creditor's rights - income

According to the relevant provisions of the Civil Procedure Law of the People's Republic of China, the court withholds the income instead of requiring the payer of the income to be repaid when due, which is different from general creditor's rights. In practice, "income" refers to the wages, bonuses, remuneration for labor services and other property earned and due by natural persons based on non-business reasons such as labor services. For the enforcement of income, a ruling on detention or withdrawal shall be made in accordance with the provisions of article 243 of the Civil Procedure Law of the People's Republic of China, and a notice of assistance in enforcement shall be issued to the unit to which the person subject to enforcement belongs. The differences between the enforcement and general claims are as follows:

1. The position of the third person is different. In the income withdrawal procedure, the third party is in the position of assisting the obliger. In the enforcement procedure of the due creditor's right, the secondary debtor is in the position of being enforced.

2. The execution procedure is different. When the people's court decides to withhold or withdraw the income of the person subject to enforcement, it shall make a ruling and issue a notice of assistance in enforcement. The people's courts may also take measures to withdraw income ex officio. In accordance with Article 45 of the Provisions of the Supreme People's Court on Several Issues Concerning the Enforcement Work of the People's Courts (for Trial Implementation), the person applying for enforcement or the person subject to enforcement shall submit an application, and the people's court shall issue a "Notice of Performance of Debts Due" to the third party, and if the third party does not raise an objection within the prescribed time limit and fails to perform, the enforcing court may rule to enforce against it.

3. The examination of enforcement objections is different. When withdrawing the income of the person subject to enforcement, the unit receiving the notice of assistance in enforcement must take measures to assist in enforcement in accordance with the requirements of the notice of assistance in enforcement, otherwise it will bear the corresponding legal responsibility; Where an objection to enforcement is raised, the people's court shall conduct a review. However, when the people's court enforces the debtor's due creditor's rights, in accordance with Article 47 of the Provisions of the Supreme People's Court on Several Issues Concerning the Enforcement Work of the People's Courts (for Trial Implementation), if the third party raises an objection within the prescribed period, the people's court shall not enforce the third party, and the objection raised shall not be examined, and the applicant for enforcement can only resolve it through a separate lawsuit.

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