A Note on Consumption Restrictions and Exit Restrictions

Reflections on the Chinese Legal Environment

• If you are the legal representative of a Chinese company consumption restrictions and exit restrictions can be imposed on you to enforce debts of the company

• This can happen even after you have left the company and resigned from your post of legal representative

• Consumption restrictions and exit restrictions are recorded in the social credit system resulting in reputational and potentially economic damage

One characteristic of the Chinese legal environment is the practice of Chinese courts to impose consumption restrictions on debtors to enforce a creditor’s claim. Nobody wants to be prohibited from traveling on airplanes or high-speed trains. Few business people are happy to forgo the comfort of business hotels and other luxury spending. As consumption restrictions are published on the website of the social credit system and other online data bases for everyone to see, there is a good chance that debtors will rather pay their debts than perpetually suffer reputational and potentially economic damage. Courts also have the power to impose exit restrictions on debtors. An exit restriction bans you from leaving China.

If the debtor is a company, the consumption restriction automatically extends to the company’s legal representative, key person-in-charge, directly accountable personnel who have an influence over debt performance, and the actual controller of the company. In other words, if the Chinese company you are responsible for does not perform one of its debts, there is a real risk that a consumption restriction will be imposed on you and this may make it difficult for you to continue performing your work duties or to find a position with another employer. Even worse, you may be banned from leaving China.

What Does it Mean to be Subject to Consumption or Exit Restrictions?

If you are subject to a consumption restriction, you may not carry out the following activities:

• Use high speed trains or purchase airline tickets, or buy a second class or above ticket for any public transport;
• Stay at star-rated hotels, night clubs or use golf courses;
• Purchase real estate, build new housing property, expand housing property, or carry out extravagant housing renovation;
• Lease premises such as high-grade offices, hotels and apartments etc. to be used as office premises;
• Purchase an automobile not essential for business operation;
• Travelling and vacationing;
• Enroll children in private schools;
• Pay high insurance premiums to purchase insurance and wealth management products.

In practice, the court enters your name and passport number into a database and if the system works fine you will be automatically prevented from booking airplanes and trains in China because the database is connected with the ticket vending systems. If you are subject to an exit restriction, you are prevented from leaving the country. Once the court has issued an exit restriction court officers will insert your passport number into a database. Customs officers at border control points will then automatically see an alert when you try to leave the country and will turn you back.

Case Study: Consumption and Exit Restrictions after a Legal Representative’s Resignation

Imagine some time ago you resigned from the post of legal representative of a company in China. Months after your resignation, when trying to book a plane ticket online a notice pops up telling you that you are not eligible to buy the ticket. The same happens when you try to buy a train ticket. And when trying to leave China you are surprised that border control officers turn you back. Soon friends inform you that you have a negative entry on the social credit system. You learn from your ex-colleagues that the shareholders of the company failed to appoint a new legal representative after your resignation. There is a new manager there, but he or she has never been registered as legal representative. As a consequence, the company has not applied to the relevant authority to remove your name from the company register and you are thus still listed in the register as the legal representative. You find out that after your departure a court ordered the Company to make a payment to one of its creditors. To improve the chances of enforcement, the creditor applied to the court to impose a consumption restriction order and an exit ban on the legal representative of the company. The judge looked up the company register, found that you were registered as legal representative and promptly issued the restriction orders against you. It strikes you as odd that you never received any information about the claim, the law suit or the restriction orders. Accordingly, you were never given a chance to defend yourself. Surely, you think, all this must be a big misunderstanding.

Courts May Rely on the Company Register Even if it is Wrong

You think it may be a good idea to inform the judge who issued the restriction orders that you had long left the company and resigned from the post of legal representative when those orders were issued. You present evidence and argue that you were no longer responsible for the company nor are you now in any position to cause the company to pay its debts. You believe the restriction orders against you must be lifted because you are not the legal representative and if you have no power to cause the company to pay its debt there is no way the restrictions can serve their purpose to enforce the creditor’s claim against the company. The Court, after weeks of deliberation, turns down your application. You are being told that it does not matter if you are the legal representative of the company or not. As long as your name is recorded in the register the court will rely on the register. Even though you find this grossly unfair, it turns out that this is the practice of other courts in China too. According to an online news briefing by the Second Intermediate Court of Beijing, “if a company is the person subject to enforcement, the court may take measures to restrict consumption of its legal representative. The identification of the legal representative of the company shall be based on the industrial and commercial registration information. In case the individual affected claims that the industrial and commercial registration information is incorrect, he/she shall seek to get it corrected through other legal means.” In other words, the court will solely count on the registered information to identify the legal representative, but will not lift the consumption restriction order even if presented with evidence that the information recorded in the company register is wrong. You may sue the company to change the register. But a law suit may take months or even years. In the meantime, you may settle down in China, take slower trains, and spend a little less on luxury.

What Can You Do?

Besides suing the company, you may think about trying to convince its shareholders to appoint and register a new legal representative or you may try to convince its creditor to revoke its application for consumption and exit restrictions. You may even think of paying the company’s debt to regain your freedom. There are also some other measures you may consider. After all you are still registered as the company’s legal representative. However, any such actions need to be carefully considered and planned. In hindsight, you wish you had taken precautionary measures when taking on the executive job or while working for the company.

There is no Legal Basis for Consumption Restrictions

While Art. 262 of the PRC Civil Procedure Law provides for a legal basis for exit restrictions against the “enforcee”, there does not exist a similar legal basis for consumption restrictions. Consumption restrictions are an innovation of the Chinese courts. The Supreme People’s Court (“SPC”) issued “Several Provisions on Restricting High-level Consumption of Enforcees” in 2015 authorising people’s courts to restrict the consumption of enforcees. According to the SPC, “these provisions are formulated pursuant to the relevant provisions of the Civil Procedure Law of the PRC, taking into account the actual experience of civil enforcement work of the People’s Courts”. However, it remains unclear which of the provisions of the Civil Procedure Law the SPC deems to be relevant in the context of consumption restrictions. There is no provision in the Civil Procedure Law specifically dealing with consumption restrictions against a debtor and even less against the legal representative or a person who just happens to be registered in the company register as the legal representative of a debtor. Consumption restrictions, including the way they are applied, are a creature of jurisprudence without a basis in the law.

Author

Dr. Jakob Riemenschneider
German attorney-at-law and tax adviser
registered foreign lawyer in Hong Kong

The author is a partner with international law firm Taylor Wessing. He frequently advises companies, shareholders, and management on corporate law and corporate governance in an international context. His focus is on German-Chinese business relations.