A Historical Breakthrough of China's Factoring Legislation

A Historical Breakthrough of China's Factoring Legislation

May 28, 2020 -- a day that is to be remembered by all Chinese factors! A chapter of factoring contract has been successfully added into the contract section of the newly approved Civil Code of the People's Republic of China at the third session of the 13th National People's Congress.

The Civil Code is the first law devised as Code in China since the founding of PRC, signifying a milestone in the legislative process of our country.

To meet the needs of the development of factoring industry and business environment optimization in China, the latest Civil Code has made several changes and adjustments: listing factoring contract (Chapter 16, Part III of the draft) as a new typical contract; expanding the scope of guarantee contracts, clarified the guarantee function of atypical guarantee contracts such as financing leasing, factoring and ownership retention, and stipulated that guarantee contracts include mortgage contracts, pledge contracts and other contracts showing guarantee features (the first paragraph of article 388 of the draft). The basic legal framework of factoring business is composed of the above stipulations and a part of the clause of assignment of creditor's rights in Chapter 6 in the contract part of the Civil Code.

After the rules of commercial creditor's rights assignment (for factoring) are included in the civil code, China will become the first country in the world to define factoring contract as an independent typical contract in the Civil Code. This is a landmark event in international factoring industry, which will further promote the development of China's factoring industry, and provide reference for pushing forward commercial creditor's rights assignment (for factoring) legislation in other countries and regions. Marked by the adoption of Civil Code, factoring business has made a historic breakthrough from being entitled as unnamed contract to named contract, from quoting general provisions on assignment of creditor's rights to abiding by specific legal stipulation. This is affirmation of factoring business from legislative aspect, and the result of the long-term joint efforts of all factors and practitioners in relevant financial and legal fields, laying a solid foundation for the growth of supply chain finance industry. The chapter of factoring contract sets up the basic normative framework of factoring from the definition of factoring, the content and form of the contract, contract fulfillment, the classification of recourse or nonrecourse factoring, compensation sequence, and the application of the rules of creditor's rights assignment, etc. On this basis, with the deepening and development of factoring practice, we believe that the supporting judicial interpretation, laws and regulations, and industry norms will be gradually improved, forming a positive interaction between law and practice.

In view of the industry pain points, the specific provisions of the Civil Code have established the following rules, clearing three major obstacles for the development of the industry: first, future receivables can be factorized; second, agreements on the prohibition of the assignment of receivables is not applicable to factoring; third, the assignment of accessory rights shall not be affected due to non-registration. In the meantime, according to factoring business practice, the chapter of factoring contract defines protective rules for factors and controls three types of major risks: fictitious accounts receivable risks, basic transaction change risks and refinancing risks. The above provisions are of great significance in expanding the potential of factoring business and preventing industry risks, and will play a hugely positive role in promoting and standardizing the development of China's factoring industry.

Han Jiaping

Director and researcher of credit research institute of China academy of international trade and economic cooperation of MOFCOM

May 28, 2020