PRC banks chase defaulters offshore
Chinese financial institutions are increasingly turning to third-party litigation funding as they try to recover assets from company founders who have defaulted and fled the country.
Third-party litigation funding entails providers taking on cases on a “no win, no fee” basis to track down debtors’ assets and enforce court judgments against them. It came to Asia in 2017 when both Singapore and Hong Kong passed legislation allowing its use in certain circumstances, and in 2019 the Beijing International Arbitration Centre added mention of it to its rules.
“The most commonly seen cases are defaults by PRC companies with personal guarantees,” said Irene Lee, general counsel for Greater China and South-East Asia at Dominor Litigation Funding. “Financial institutions lent really big sums of money and when the companies are unable to pay usually the PRC financial institutions will not be able to recover much within mainland China because the guarantor will often have most of the assets abroad in places like Hong Kong, Singapore, the US, Canada, the British Virgin Islands, the UK, Bermuda or the Middle East.”
Chinese debtors have employed a range of tactics to put their assets out of reach of domestic creditors, according to the 2025 Report on International Asset Recovery for PRC Financial Creditors, jointly published in July by Beijing Hylands Law Firm, Omni Bridgeway and Global Yudu. These include transferring assets to relatives at below-market prices, using shell companies or offshore trusts to hold assets, or even immigrating and changing their names to try to throw creditors off the scent.
Financial institutions in mainland China are not used to pursuing claims overseas, but are dealing with bad loans after companies made big offshore acquisitions that soured after the Chinese stock market bubble burst in 2015.
“Currently, Chinese financial creditors exhibit varying levels of awareness and expertise in international recovery,” the report said. “Large state-owned institutions, such as commercial banks and asset management companies, often lag due to slower decision-making processes. In contrast, smaller financial institutions, microfinance providers, and private lenders, with more agile decision-making, have already begun pursuing international recovery.”
Acting swiftly is crucial, as creditors who act first can prioritise asset seizures and usually achieve higher recovery rates. They also have a limited number of years to enforce judgments and arbitral awards, which varies by jurisdiction. In Singapore the enforcement period is six years and in California it is 10 years.
Mainland financial institutions and asset management companies – so-called bad banks – are among those enlisting litigation funders to track down offshore assets, as they face pressure to clean up their balance sheets.
“We are seeing the most interest from privately-owned creditors due to the comparative ease with which they can transact,” said Anthony Ellwood-Russell, investment manager – asset tracing and intelligence at Omni Bridgeway.
Lately, other kinds of creditors are following the trend.
“In the past six to 12 months we have seen bigger companies and SOEs reaching out to us and saying they need to do something to recover their bad debts,” said Dominor’s Lee.
“State-owned enterprises will probably not have worked with litigation funders before so there is a layer of internal politics. You have to find the person in the organisation who is willing to try something new.”
Cost considerations
Under China’s contingency framework, local lawyers charge up to 6%–18% for successful recoveries, depending on the amount, after the maximum fees were lowered in 2021.
“These caps are substantially lower than the 30% cap that previously existed, which has led to a decline in full-risk contingency fee arrangements,” wrote law firm Eversheds Sutherland. “This has also led to an increased interest in third-party funding arrangements, which is not subject to these caps, as PRC law does not currently regulate or limit third party funding arrangements.”
Litigation funding tends to be more expensive than onshore legal fees, if it is successful, with funders taking their cut from the recovered assets to cover legal fees and enforcement costs racked up during the process.
“In our experience, onshore creditors recognise that our funded approach offers them a risk-free avenue to recover on their NPL claims which would otherwise likely remain largely unpaid,” said Ellwood-Russell. He said that since third-party litigation funding providers are typically focused on recovering overseas assets they are complementary to mainland lawyers undertaking domestic enforcement.
“Some creditors might be unhappy that they will only get back 70%–80% using a litigation funder, but without funders they would recover nothing,” said Dominor’s Lee. “Furthermore, funders protect their downside.”
Dominor takes on only about 5% of cases presented to it for funding, Lee estimated, as in most cases the potential recovery will not be enough to justify the expense involved. Costs vary depending on how many jurisdictions are involved and what judgments have been made in the mainland.
“Only a small percentage are enforcements of arbitral awards, which are easier to enforce under the New York convention,” said Lee. “For PRC court judgments it’s more difficult. We need to see if the jurisdictions have entered into any reciprocal enforcement arrangements.”
Under the New York convention, Chinese arbitration awards are recognised and enforced in about 170 jurisdictions. Chinese court judgments are now practically enforceable in at least 47 countries and regions, according to the international asset recovery report.
In many cases Chinese courts ruled in favour of creditors by default because the debtor had fled the country, which can create difficulties when seeking to enforce the judgments overseas.
“If it’s a personal guarantor who fled, they will not have responded to or participated in the legal proceedings,” said Lee. “A lot of overseas courts are sceptical when it comes to default proceedings where the respondent hasn’t acknowledged them.”
In cases where debtors resist enforcement attempts, the creditor’s side may need to apply to freeze assets and seek discovery orders allowing them to track down debtors’ ultimate bank accounts using US dollar transfer information or obtain details of the beneficial owners of companies in places like the Cayman Islands – which can go on for years.
On the other hand, some debtors may give up the fight when they realise a creditor is backed by a litigation funder and has the resources to pursue their assets around the world.
“There have been cases where when the other side realised there was a funder they wanted to talk about settlement,” said Dominor’s Lee. “A good number of our clients were able to reach satisfactory settlement within a reasonable time.”