The “Provisions of the Supreme People's Court on Several Issues concerning Equity Enforcement by People's Courts” will come into force on January 1, 2022

In order to unify the standards for equity enforcement and solve the disadvantages and difficulties in such enforcement, the Supreme People’s Court promulgated the “Provisions of the Supreme People’s Court on Several Issues concerning Equity Enforcement by People’s Courts” (Fa Shi [2021] No.20, hereinafter referred to as the “Provisions”) on December 20, 2021, which will come into force on January 1, 2022. The key points are described below.

1.Scope of applicable objects

The “Provisions” shall be applied to equity interests in limited liability companies and companies limited by shares, and shares of companies limited by shares listed and traded on stock exchanges established in accordance with law and other national stock exchanges approved by the State Council (collectively, referred to as the “Listed Companies Shares”) are excluded. The reason is that the Listed Companies Shares are regulated by CSRC in accordance with the securities-related laws and regulations, and the market value evaluation, liquidity and artificial changes in the value of such shares are relatively controllable, so exceptions are made.

2.Confirmation of Equity Value

With respect to the difficulties in evaluating equity value, the “Provisions” adopts a three-step rule: firstly, if the value can be determined, it shall be limited to the extent that the price is sufficient to pay off the amount of creditor’s rights and execution expenses determined by the effective legal documents; secondly, if the value cannot be determined, it can be frozen according to the proportion or quantity applied for freezing by the applicant for execution; and thirdly, if the party subjected to enforcement believes that the value of frozen equity is too high, it may raise an objection and attach the proof of submission, and after it is ruled through examination that the objection is tenable, the freeze of the obviously excessive part shall be unfrozen.

It can be seen that in the case of disputes over the amount of equity, the court could distinguish the distribution of the burden of proof of equity value.

3.Conditional “Lock-in” of Equity Value

The “Provisions” lists the circumstances that affect the equity value and stipulate corresponding “lock-in” measures:

(1) The transfer, pledge or other acts that hinder execution by the party subjected to enforcement shall not act against the applicant for execution.

(2) The relevant companies could be required to submit a written report to the court on the actions with significant impact on the frozen equity value, such as capital increase, capital reduction, merger, division, etc., before the implementation of such actions. The court shall notify the applicant for execution upon receipt of the report, except where state secrets or trade secrets are involved.

(3) The dividends, bonus and other proceeds entitled to the person subjected to enforcement based on the equity can be frozen.

(4) Where the party subjected to enforcement applies for disposal of the frozen equity on its own, it shall obtain the consent of the applicant for execution and other known enforcement creditors, or the disposal price shall be sufficient to pay off the debts subjected to enforcement, and the disposal shall be completed within three months at most.

(5) Where the frozen equity is auctioned, the reference price for disposal of equity shall be determined in accordance with the procedures specified in the “Provisions of the Supreme People’s Court on Several Issues Concerning the Determination of Reference Price for Disposal of Property by People’s Courts”. If it is found during the auction that the price of the corresponding equity is significantly higher or lower than the amount of the creditor’s rights, the share of the auction equity can be adjusted.

(6) Where the evaluating of the frozen equity is entrusted, the party subjected to execution shall bear the adverse consequences of insufficient materials required for the evaluation. If the evaluation report cannot be issued due to insufficient materials, the court can determine the starting price of an appropriate amount higher than the execution fee after a written application by the applicant for execution.