Application for Dispute over Liability for Damages Caused by Property Preservation During Litigation

[Case Attorney]: Hui Zhaoyang

Case details 
The plaintiff, a certain High-Voltage Disconnect Switch Co., Ltd. (hereinafter referred to as the “Isolation Company”), filed a lawsuit with the court, claiming that the defendant, the Shenyang Office of Zhong某某 Asset Management Company (hereinafter referred to as the “Chang某 Company”), had wrongly frozen more than 60 million yuan of funds recovered by the Isolation Company during preservation measures taken in another case, and this wrongful freeze had lasted for over two years, severely disrupting the Isolation Company’s production and operations. The plaintiff is seeking compensation from the Chang某 Company for losses exceeding 7 million yuan. 
The court’s findings revealed that in July 2009, Chang Company filed a lawsuit with the Liaoning Provincial High People’s Court, requesting that the first defendant, a certain company, repay the principal amount of over 350 million yuan plus interest. Chang Company also sought to lift the corporate veil and hold 12 enterprises—including Isolation Company—jointly and severally liable for the debt. In December 2010, the Liaoning Provincial High People’s Court issued a first-instance judgment, ordering the first defendant, the certain company, to assume repayment responsibility but dismissing Chang Company’s claim against Isolation Company. Dissatisfied with the first-instance judgment, Chang Company filed an appeal with the Supreme People’s Court. In June 2011, the case was remanded back to the Liaoning Provincial High People’s Court for retrial. During the retrial, Isolation Company submitted to the court a separate judgment from the Supreme People’s Court as evidence, demonstrating that Isolation Company and the first defendant, the certain company, are both independent legal entities and that the first defendant’s debt is unrelated to Isolation Company. Despite this knowledge, Chang Company still filed a request for property preservation with the Liaoning Provincial High People’s Court, seeking to seize and freeze assets under Isolation Company’s name. On December 24, 2011, the Liaoning Provincial High People’s Court froze more than 67 million yuan of execution proceeds belonging to Isolation Company, which were held by the Shenyang Intermediate People’s Court. After undergoing first-instance and second-instance proceedings, the Supreme People’s Court issued a final judgment on December 14, 2013, dismissing Chang Company’s claims against Isolation Company. On January 16, 2014, based on the final judgment, the Liaoning Provincial High People’s Court issued a ruling lifting the freeze on the aforementioned execution proceeds belonging to Isolation Company. Isolation Company received the full amount of these execution proceeds on June 5, 2012. 
Trial outcome 
The final court in this case held that the debtor of Chang Company was not the Isolation Company. Therefore, any application for property preservation against the Isolation Company should be made with caution and after fully anticipating the risks involved. Not only did Chang Company fail to provide any evidence proving that the Isolation Company should bear joint and several liability with the first defendant, Company A; moreover, despite knowing that the Supreme People's Court had already ruled in a final judgment that the Isolation Company and the first defendant were separate legal entities with no affiliation whatsoever, Chang Company still insisted on applying for preservation measures. This demonstrated a subjective error on its part. Consequently, in accordance with Article 105 of the Civil Procedure Law of the People's Republic of China, Chang Company should bear liability for compensating the losses suffered by the Isolation Company due to its erroneous application for property preservation. 
Typical significance 
This case is a typical dispute over liability for damages arising from property preservation measures taken during litigation. Under China’s Civil Procedure Law, parties are entitled to apply for preservation measures during the course of litigation. To ensure the enforceability of future effective court judgments and to facilitate the smooth recovery of enforcement proceeds, parties often request the court to issue interim property preservation orders during litigation. Such measures are also intended to put pressure on the defendant. However, parties often overlook the fact that interim property preservation is a double-edged sword; their actions in applying for such preservation—especially if the application is made maliciously—can cause significant harm to themselves. 
Article 105 of China’s Civil Procedure Law explicitly stipulates: “If an application is found to be erroneous, the applicant shall compensate the respondent for any losses suffered as a result of the preservation measures.” As one of the four major asset management companies, Chang Company typically exercises great caution when handling litigation cases. However, the experience it encountered in this particular case serves as a stark warning. Its counsel did extensive work in the lawsuit brought by Chang Company against Isolation Company, seeking joint and several liability, including obtaining comprehensive business registration files and property information on all defendants, with the aim of bringing Isolation Company within the scope of those liable for repayment. Unfortunately, the evidentiary strength of their evidence proved insufficient. In this case, we represented Isolation Company and presented robust evidence. After Chang Company’s claim against Isolation Company was dismissed by the court, we then took on the role of representing Isolation Company in filing a counterclaim against Chang Company, demanding compensation for the damages caused by the erroneous preservation measures. Moreover, the legal opinions we submitted in both of these cases were fully adopted by the courts. Ultimately, Chang Company paid a heavy price for its wrongful preservation actions. 
During the handling of a case, when a party is subjected to improper property preservation measures, we should advise and assist the party in using legal means to protect its rights. At the same time, however, we would like to remind all lawyers that when advising clients to request interim property preservation during litigation—especially when recommending that clients take such measures—they should exercise utmost caution to avoid causing any harm to their clients through their advice and recommendations, and to prevent unnecessary professional risks from arising.