To unify the law enforcement standard for property preservation in judicial practice and reduce the threshold for property preservation to better protect creditors’ claims and deter debtors from concealing or transferring property, the Supreme People’s Court promulgated the Provisions of the Supreme People’s Court on Several Issues Concerning Property Preservation Cases Handled by the People’s Courts (the “Preservation Provisions”) on November 7, 2016 to fully carry out the expected functions of the property preservation system and balance the protection of the debtor’s rights and interests in law. The Preservation Provisions represent breakthroughs in several aspects as highlighted below:
1. Upper Limit of Security Amount
Although the Civil Procedure Law is silent about the amount of the security that should be provided by a petitioner for a preservation order, the court typically requires a security equivalent to the full amount of the property to be preserved. However, this requirement is generally too high for petitioners to bear, resulting in a very low percentage of property preservation applications. Therefore, the Preservation Provisions adjust the amount of security for property preservation applications and require that the amount of security shall not exceed 30% of the value of the property to be preserved or the subject matter at issue. It is expected that this adjustment will increase the percentage of applications for the order and promote the functionality of the property preservation procedure.
2. Security Exemption Circumstances
To properly protect financially disadvantaged creditors and public interest at large, the Preservation Provisions specially provide for circumstances where security is exempt, such as: Recourse for alimony, consolation payments and compensation to individuals; victims of domestic violence that are in economic hardship; damages in public-interest litigation; damage claims asserted by Good Samaritans as a result of injury in the act; less controversial damages cases; or property preservation petitioners with better payment capabilities.
3. Balance to Lawful Rights and Interests of Creditors and Debtors
Another highlight of the Preservation Provisions is balancing the rights and interests of parties to ensure that debtors are being protected while the claims asserted by the petitioner of the property preservation order are also being satisfied. For example, Article 13 of the Preservation Provisions provides that a people’s court shall choose for preservation property that has less impact on the production and business operation activities of a debtor, and that when preserving production and business operation-related property such as factories, machinery and equipment, the people’s court shall instruct that continued use of such property under the custody of the petitioner shall still be allowed. To the extent that the lawful rights and interests of the creditor are not impaired, the debtor should also be allowed to dispose of the preserved property during the preservation period so that the debtor’s property rights are not being subject to excessive restrictions. However, such disposal shall be supervised and conducted at reasonable prices within a designated period, and the relevant proceeds shall be placed under control. In addition, the Preservation Provisions stress that the people’s courts shall execute corresponding attachment, seizure and freezing measures in accordance with their property preservation rulings and shall not preserve property excessively. Also, when preserving bank accounts, the people’s court must be specific about the amounts to be frozen.
4. Resolution of Malicious Delay in Preservation Cancellation
To resolve the issue of malicious delay in the cancellation of preservation, the Preservation Provisions specifically provide that if an arbitration institution rejects a request for arbitration, an arbitration application is rejected pursuant to law, a complaint is not accepted or is rejected by an effective court ruling, the petitioner for the property preservation order shall timely apply to cancel the preservation. If the cancellation application is not filed with a people’s court in time, the petitioner must provide compensation for all losses incurred by the party subject to the preservation.