The integration of the factoring contract into the newly promulgated PRC Civil Code can be regarded as a milestone in the factoring industry. Although factoring contracts are deemed relatively unpopular compared to sales contracts, loan contracts, lease contracts and other typical contracts, the PRC Civil Code not only establishes the basic principles for the settlement of legal problems and disputes for factoring, but it is also a big sign from the government’s eagerness to solve the problem of the financing of enterprises at the legal level.
Definition
A factoring contract has been previously defined in the International Factoring Convention 1998 and the regulatory provisions issued by the State Banking Regulatory Commission. However, Article 761 of PRC Civil Code defines a factoring contract clearly for the first time at the legislation level, as outlined, ” A factoring contract refers to a contract whereby the obligee of accounts receivable assigns its existing or future accounts receivable to a factor, who provides services such as financial accommodation, management or collection of accounts receivable, and guarantees for payment by obligors of accounts receivable. “
Formula
According to the definition in the PRC Civil Code, the essence of a factoring contract can be simply understood by adhering to the following formula:
A factoring contract = 1 fixed element (assignment of creditor’s rights) + 1 or more random element(s) (one or any of the following elements: financing accommodation / creditor’s rights management / debt collection / payment guarantee)
Example
Applying this formula, we may use a simple case to briefly explain what factoring is, for example:
A car trader, Company A, has a cooperation with a car seller, Company B, in which Company A will provide 50 million worth of new cars to Company B; However, Company B requires to pay the full amount within 6 months after signing the contract. In order to carry out the sales contract smoothly and protect its own interests to the maximum extent, Company A signs an agreement of the assignment of accounts receivable to a factoring company, Company C. Company C pays the payment in advance to Company A, and Company A transfers the creditor’s rights to Company C. If Company B fails to pay after six months, then Company C has the right to claim creditor’s rights against Company B. In this way, Company C becomes the factor of this auto transaction, providing the financial guarantee for the transaction between Company A and B.
Conclusion
The above case is a simple example which involves the assignment of account receivable plus debt collection, actually, a factoring contract can be understood as a mixed contract composed of the assignment of creditor’s rights and financing accommodation and/or creditor’s rights management and/or debt collection and/or payment guarantee. Thus, a factoring contract can be applied with the typical contract theories found within a loan contract, entrustment contract or guarantee contract, therefore, the pivotal point for a factoring contract is to standardize the assignment of creditor’s rights. In addition, within the provisions of the PRC Civil Code, the content and form of a factoring contract, the legal consequences of fictitious creditor’s rights or trade background, factoring with recourse and non-recourse factoring, and the handling of multiple claims transfer are all further outlined.
It is true that there are still some flaws and vague stipulations for this type of typical contract that have been newly incorporated into the PRC Civil Code, which needs to be further improved via future legislation. However, it is of great significance to integrate the factoring contracts into the Contract Part of the PRC Civil Code, as it can attract more financial institutions and market funds to participate in the factoring business, expand financing channels for small and medium-sized enterprises, and solve the problem of single financing channels for enterprises. It helps to change the long-term financing structure of enterprises relying on bank loans, thus attempting to solve the financing difficulties of small enterprises, and provides a clear and sufficient basis for judicial organs and arbitration institutions to deal with disputes in this field. If you have any questions or would like to seek our professional advice in this field, please send email to info@dandreapartners.com to contact us.
In the “Ten Typical Cases of Cross-border Data Disputes” released by the Guangzhou Internet Court in September 2024, the case of cross-border transfer of personal information by an international hotel company [(2022) Yue 0192 Min Chu No. 6486] is called as “the first case of cross-border transfer of personal information” in China , which initially
Jiangsu Province is embarking on an ambitious initiative to secure its leadership position in emerging industries through a newly launched pilot-program. The program, unveiled by the Jiangsu Provincial Development and Reform Commission, aims to develop pioneering clusters in 12 future-facing industrial sectors, spanning 21 locations across the province. This strategic move reflects Jiangsu’s determination to
The Shanghai Municipal Bureau of Justice issued on 13 June 2024 and entered into force on 1 August 2024 the Measures for the Promotion of Ad Hoc Arbitration in Shanghai for Foreign-related Matters in Commercial and Maritime Fields (For Trial Implementation) which refers to Ad Hoc Arbitration Measures in this article. For most people, ad
#China
Manage Consent
To provide the best experiences, we use technologies like cookies to store and/or access device information. Consenting to these technologies will allow us to process data such as browsing behavior or unique IDs on this site. Not consenting or withdrawing consent, may adversely affect certain features and functions.
Functional
Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes.The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
To provide the best experiences, we use technologies like cookies to store and/or access device information. Consenting to these technologies will allow us to process data such as browsing behavior or unique IDs on this site. Not consenting or withdrawing consent, may adversely affect certain features and functions.
Functional
Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes.The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.