An export company in Shenzhen, China (“Shenzhen Company) began selling communication products to a Russian company (“Russian Importer”) in September 2008. The main business contact of the Russian Importer was its president, and his assistant usually placed orders. The transaction method between the two parties for many years was that the Russian Importer placed an order via email or Skype, and the Shenzhen Company confirmed it with a proforma invoice. The Russian Importer settled the payment within 30 days after the Shenzhen Company shipped the goods.

In December 2011, the Russian Importer placed an air freight order of about US$90,000 and a sea freight order of US$820,000 to the Shenzhen Company. After the air freight order was completed and shipped, the Russian Importer did not raise any objections. However, there was a problem with the sea freight order, and the Russian Importer requested to cancel the order on the ground that the company president did not confirm it. In the case of shipment, the Shenzhen Company was forced to negotiate with the Russian Importer and lower the price to US$700,000; the payment method was also adjusted. The Russian Importer agreed to pay US$300,000 in March 2012, and pay up the entire purchase price within the next three months. After the two parties reached a price reduction agreement, the Shenzhen Company released the goods for the sea freight order. However, the Russian Importer did not pay $300,000 in March 2012 after receiving all the goods.

In August 2012, the Shenzhen Company sent personnel to Russia to negotiate payment with the Russian Importer and the two parties signed a settlement agreement. After signing the settlement agreement, the Russian Importer paid a total of US$400,000 for the goods to the Shenzhen Company by September 2013. After September 2013, the Russian Importer totally ignored the payment request of the Shenzhen Company.

After being retained by the Shenzhen Company, we entrusted a local Russian lawyer to conduct a credit investigation on the Russian Importer. The investigation results showed that the Russian Importer deliberately played “company mergers” to default on its debts.

Soon after signing the settlement agreement with the Shenzhen Company, the Russian Importer merged with eight other Russian companies to form a limited liability company. The combined company was registered in the Russian Far East, and the Russian importer ended its existence as an independent legal entity. The assets of the Russian Importer, together with all its rights and obligations, were transferred to the combined limited liability company.

The legal opinion provided by the Russian lawyer stated that such merger & acquisition were often carried out on companies that are heavily indebted. There is such a way of evading debts in Russia, which can be to establish a special purpose company, "absorb" some debt companies through a merger, the merged debt company is cancelled, and all assets, credits and debts are transferred to the special purpose company. Although all rights and obligations will not disappear or extinguish according to the legal rules for the inheritance of credits and debts, the special purpose company shall inherit all the credits and debts of the merged company. However, generally speaking, this special purpose company has only the minimum assets and minimum registered capital, and uses a nominal shareholder and a nominal CEO. After the Russian Importer was merged, the Shenzhen Company could not sue the Russian Importer who had gone through the deregistration of the company because it no longer existed as a legal entity and cannot act as a defendant, but only sue its debt inheritor. The only problem is that the new combined company can be sued as a defendant, but it does not have any assets because it was created to absorb the debts of the merged company.

after investigation, the Russian lawyer found that the new combined company did not have any valuable assets, and it did not make much sense to go to the local court to sue. The Shenzhen Company suffered heavy economic losses as a result.

Lessons and enlightenment:

The Russian Importer played with the law and take advantage of legal loopholes, which was well unpredictable to the exporter. Definitely, it is unrealistic for foreign trade companies to understand the laws of various countries, and to be familiar with the legal loopholes and legal gray areas of various countries. But for foreign buyers, especially for buyers in countries and regions with poor business reputation, the exporters must always maintain a sense of risk prevention, and should not relax guard even for old customers. More importantly, the amount of accounts receivable should be kept within a reasonable range. If the amount of accounts receivable is too large, it may induce foreign importers to behave badly.