Practical Implications of Consumption Restriction on Foreign Legal Representatives of Chinese Companies

As foreign-invested enterprises continue to play an important role in China's economy, it is increasingly common for foreign nationals to serve as the legal representative of Chinese subsidiaries. Although holding this position does not, in itself, make an individual personally liable for the company’s debts, it may expose the individual to certain enforcement measures if the company fails to comply with an effective judgment or other enforceable legal instrument.

Of particular relevance are consumption restrictions, which may restrict certain travel and other expenditure by the company’s legal representative. In some cases, the court may also separately impose an exit restriction, which may prevent the individual from leaving China. These measures can have significant practical consequences for foreign legal representatives, particularly those who reside in or frequently travel to China.

1 Legal Framework
Under the Provisions of the Supreme People's Court on Restricting High Consumption and Relevant Consumption of the Persons Subject to Enforcement (2015), where a company is the person subject to enforcement and is subject to consumption restrictions, its legal representative, key persons in charge, directly accountable personnel who have an influence over debt performance, and actual controllers are also prohibited from engaging in specified high-consumption or non-essential spending activities. These restrictions include: 

• Taking flights, travelling in soft-sleeper compartments on trains, travelling in second-class or higher cabins on ships, taking any seat on G-series high-speed trains, or taking first-class or higher seats on other high-speed trains;
• Staying at star-rated hotels, night clubs or golf courses;
• Purchasing real estate, building or expanding housing, or carrying out high-end residential renovation;
• Leasing premises such as high-grade offices, hotels and apartments to be used as office premises;
• Purchasing vehicles not essential for business operations;
• Travelling and vacationing;
• Enrolling children in high-fee private schools;
• Paying high insurance premiums to purchase insurance and wealth management products.

Where a legal representative wishes to undertake restricted activities for personal purposes using personal property, he or she may apply to the enforcement court for permission.

Upon application by the enforcement applicant or on its own initiative, the court may restrict a company’s legal representative and other responsible persons from leaving China where necessary for enforcement. The relevant individual may then be prevented from leaving China until the exit restriction is lifted.

2 Practical Implications 
In practice, courts may identify a foreign legal representative based on the company’s corporate registration records, including the passport information registered for the individual, as well as identity information obtained or verified during the enforcement proceedings. Once the relevant enforcement measure is imposed, the individual’s identity information may be recorded in the enforcement system and used to implement the restriction.

The restrictions apply regardless of whether the foreign legal representative is currently in or outside China. For an individual who lives or works in China, the restrictions may directly affect travel, accommodation and other activities. For an individual who is outside China, the immediate impact is generally more limited while the individual remains overseas, but the restrictions remain in place and may become practically relevant if the individual subsequently travels to China. 

Travel within China
Transportation restrictions are often the most immediate consequence of a consumption restriction. In practice, an affected foreign legal representative may be unable to purchase restricted high-speed rail or airline tickets using his or her passport. The restriction is more likely to be identified at the booking stage when purchasing high-speed rail tickets or flights operated by Chinese airlines.

International flights
For international flights operated by foreign airlines, a consumption restriction may not necessarily be identified when the ticket is booked. However, as the individual will need to present his or her passport during the departure process, the restriction may be identified before departure. 

Hotel accommodation
A reservation may be made without providing passport details, so the restriction may not be identified at the booking stage. A foreign guest will, however, need to present his or her passport when checking in. The restriction may then be identified, potentially resulting in check-in being refused or, in some cases, an alert being generated to the relevant public security authorities.

Exit Restrictions
An exit restriction directly prevents the individual from leaving China. Once imposed, the individual’s identity and passport information will be provided to the immigration and border-control authorities, and the individual may be stopped when attempting to leave China.

3 Lifting of Restrictions
Consumption restrictions will be lifted once the company has fully performed the obligations specified in the relevant effective legal instrument. They may also be lifted where sufficient and effective security is provided or where the enforcement applicant agrees to their lifting, as well as where a court accepts a bankruptcy application against the company.

A former legal representative may also apply to have the consumption restriction against him or her lifted where the change of legal representative is genuine and results from the company’s normal operation or management. In such circumstances, the former legal representative may be required to show that he or she is neither an actual controller of the company nor directly accountable personnel who influence the performance of the relevant debt.

Exit restrictions may likewise be lifted following full performance of the underlying obligations and, in appropriate circumstances, where sufficient security is provided or the enforcement applicant agrees.

Key Takeaways
Enforcement against a company can have direct consequences for the individual serving as its legal representative. This is particularly relevant where the legal representative is a foreign national, as consumption and exit restrictions may have significant practical implications for the individual’s travel to and activities in China. Companies and their legal representatives should therefore be aware of ongoing enforcement proceedings and any related measures, and consider their potential practical implications at an early stage.