Unexpected Visits: an Old Method for Credit Recovery

In China, it is not unusual for companies to receive unexpected visits when Chinese New Year approaches.

Last year, for example, a couple of weeks before Chinese New Year, a foreign-invested company located in a Shanghai industrial park happened to receive a visit from a dozen people.

Wondering why these visitors had shown up on his doorstep, the company manager realized that they wanted him to settle an outstanding bill for certain renovation work. In fact, their employer told them that their outstanding salaries and year-end bonuses could not be paid because of this foreign-invested customer.

That some money was still due was true. However, the foreign company had refused to pay the balance because of substantial defects in the renovation work. A similar case also happened to another foreign-invested company with a factory on the outskirts of Shanghai. This time, around thirty workers showed up at the factory. They were asking, on behalf of their employer, for compensation. They were claiming that their company was in a difficult financial situation because the equipment supplied by this foreign-invested company was defective. This had caused a lot of damage to the production. These two episodes are evidence of the same pattern. When Chinese New Year is getting close, Chinese migrant workers’ pressure on their employers mounts. They require their employers to settle long-time outstanding salaries and year-end bonuses. Some employers try to transfer this pressure onto their debtors (or alleged debtors) by sending the migrant workers to the debtors’ office or factory. In China, this is an old method for credit recovery.

These unexpected visits will very likely have a negative impact on the target company business. They will also cause distress to the company employees and management.

What should you do in these situations? Obviously how to deal with these situations depends on the specific circumstances, such as: the merits of the claims of the creditors, the reasons why the debtor has refused to pay and, last but not least, the place where these events happen.

Essentially, the purpose of these visits is for the creditors to obtain payment by putting pressure on the other party. However, the proper venue for these claims should be the negotiating table or a court. Therefore, the main objectives for a manager facing these situations should be to achieve a balance of power with the counterpart and to transform a confrontation into a negotiation. The following ten steps could be useful in achieving these objectives.

  1. Call the local police, if there is any risk of damage to the production or violence may erupt. Unauthorized people should not be allowed to access the office and factory premises.
  2. If the local police (usually coming from the nearest police station) have difficulties in handling the situation, the manager can alert the competent embassy or consulates for help. They will report the incident to the public security authorities at a higher level. Central police departments usually have personnel with the experience and language skills to handle this kind of crisis.
  3. Request that the other party select two or three representatives. This is because it is impossible to have discussions with twenty to thirty people at the same time.
  4. Ask these representatives to show their identification documents and, if necessary, a power of attorney issued to them by the creditor company.
  5. Require that all the other visitors (except for the representatives) leave the company premises as they do not have any reason to stay any longer.
  6. Make clear that those who damage the company property or hamper business or manufacturing activities will be legally responsible.
  7. Keep a friendly and calm attitude during the negotiations. Being aggressive and violent will only cause the same reaction from your counterparts.
  8. Make it clear from the very beginning that there is no money on the company premises and that no payments will be made.
  9. Document the incident with photographs, videos or recordings.
  10. Consult your legal advisors before making any concessions or signing any settlement agreement. This is to try to avoid negative consequences for your business. For example, in one of the episodes mentioned above, the foreign company representatives had agreed to pay a sum of money to the creditor company. This payment was made as a loan to the other company. At the date of maturity, however, the creditor company refused to return the money. The “reason” put forward was that the loan agreement was invalid because in China only financial institutions are allowed to lend money.

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