Meaning
Court directives that prohibit the transfer or modification of registered capital in a Chinese domestic entity function as a safeguard during litigation. An onshore equity freeze order notifies the market supervision administration to block any changes to the company registry for the duration of the lawsuit. This action ensures that the defendant cannot liquidate their investment to avoid paying a potential court award.
Judicial Authority
Issuance of the directive occurs after the judge reviews a prima facie case and the provision of a security bond by the applicant. The onshore equity freeze order is often the first step in a commercial dispute involving shareholders or debt obligations. It remains in force for a period of three years unless the court grants an extension.
Freeze Mechanism
Effectiveness of the freeze relies on the electronic link between the court and the corporate registry. Once an onshore equity freeze order is recorded, the administrative system rejects any attempt to transfer ownership.
Financial Restriction
Restrictions imposed by the freeze extend to the right to receive dividends and other distributions from the company. While the owner retains the right to vote their shares, an onshore equity freeze order prevents them from deriving any financial benefit from the asset until the court lifts the restriction. This pressure often forces the defendant to negotiate a settlement to restore their liquidity.
