Viewpoint... Construction project accounts receivable commercial factoring financing compliance points.

After the Civil Code came into effect on January 1, 2021, the factoring contract is a separate chapter as a famous contract, and the Supreme People's Court has added "factoring contract disputes" in the revised Provisions on the Cause of Action in Civil Cases, which has a positive impact on the implementation of factoring business. The construction engineering industry is a typical capital and labor-intensive industry, which generally has the characteristics of high amount of advance capital, complex calculation of engineering quantity, long payment cycle of engineering funds, and factoring financing can properly fit the characteristics of the construction engineering industry, effectively alleviate the financial pressure and promote the construction of engineering projects.

The commercial factoring financing of accounts receivable for construction projects described in this paper refers to the transfer of construction funds receivable from the contracting unit to the commercial factoring company, and the commercial factoring company provides the construction enterprise with the borrowing funds for the construction project to solve the demand for funds, which is essentially the transfer of the claims of accounts receivable for construction projects.

Article 761 of the Civil Code states: "A factoring contract is a contract in which an accounts receivable creditor transfers existing or existing accounts receivable to a factoring person, and the factoring person provides services such as financial communication, accounts receivable management or collection, and payment guarantees for accounts receivable debtors".

According to the above-mentioned legal provisions, the transferable accounts receivable for construction projects include the existing expired project price and the future project price that has not expired but has been confirmed. Combined with the practice in the field of construction projects, the construction project progress payment, completion acceptance settlement payment, quality assurance fund, etc. can be included in the scope of commercial factoring as qualified accounts receivable.

A construction company applying for factoring financing from a commercial factoring company is usually required to perform the following basic business processes:

1. The factoring applicant and the factoring company determine the financing intention and the amount of financing, and the factoring company initiates the business process.

2. The factoring company sends a due diligence list to the factoring applicant, requesting the applicant to provide relevant information on the application for factoring financing.

3. The factoring applicant shall provide the basic contract, project payment record, invoice, approval and settlement data, acceptance data, etc. for the factoring company's approval.

4. The factoring company approves and approves, issues formal factoring contracts, factoring business applications and other transaction documents, and decides whether to require the factoring applicant to provide guarantee measures in the light of its business conditions.

5. The factoring applicant changes the accounts receivable collection account to a factoring company and notifies the debtor (explicit factoring is applicable, implicit factoring is not required)

6. Factoring applicants and factoring companies register the transfer of accounts receivable in the unified registration system for movable property financing.

7. The factoring company issues factoring financing as agreed in the factoring contract.

8. The factoring company recovers the debtor's accounts receivable (if it cannot be recovered smoothly, the applicant will be reimbursed for repurchase by reference to the factoring contract) and returns the remaining amount to the factoring applicant after deducting all financing costs and expenses.

According to the provisions of Articles 766 and 767 of the Civil Code, the types of factoring are mainly divided into "recourse factoring" and "non-recourse factoring", and the main distinction is based on determining whether the factoring applicant is subject to the legal risk of uncollectible accounts receivable. Under the type of recourse factoring, the factoring company has the right to immediately require the accounts receivable creditor to pay the full repurchase price in order to repurchase all transferred but unliquidated portions of the accounts receivable upon the occurrence of a specific "repurchase event" as agreed in the factoring contract. Under the non-recourse type of factoring, the factoring company can only claim accounts receivable claims against the accounts receivable debtor.

In the domestic factoring business, recourse factoring dominates. In the field of construction engineering, when the factoring company signs a factoring contract with the creditors of the accounts receivable of the construction enterprise, it should also try to choose a factoring contract with recourse. In the event that the debtor of the accounts receivable refuses to pay or is unable to pay, even if the accounts receivable claim has been transferred to the factoring company at this time, the factoring company may still require the creditor to be liable to the factoring company for the portion of the debtor's failure to pay within the scope of the factoring financing.

According to Article 546 of the Civil Code, if a creditor transfers a claim without notifying the debtor, the transfer shall not have effect on the debtor. The main distinction is based on whether the debtor is notified of the fact of the transfer of accounts receivable and the time and conditions of notification. For example, when the factoring business parties sign the factoring contract, they agree that the creditor will notify the debtor of the fact of the transfer of accounts receivable, which is an explicit factoring contract. Generally, the implicit factoring contract will notify or not notify the debtor only if the agreed conditions are triggered.

When the accounts receivable of construction projects are classified into factoring business, since the debtors of accounts receivable are often government departments or state-owned enterprises, they are not allowed to transfer the creditors of accounts receivable. In order not to hinder subsequent cooperation, creditors usually choose to sign dark factoring contracts and apply for factoring financing in dark factoring mode. In practice, dark factoring mode has certain legal risks for factoring companies:

(1) The factoring company did not carefully review the authenticity of the accounts receivable.

The core of the fidelity business is the transfer of accounts receivable, and the true meaning of the transfer of accounts receivable must be formed between the creditor and the fidelity company. According to Article 763 of the Civil Code, a debtor of an accounts receivable may not use the non-existence of an account receivable against a factoring agent, unless the factoring agent knows that it is fictitious.
 

In the practice of concealed factoring in construction projects, due to the inability to notify the debtor and the lack of cooperation from the debtor, it is difficult for the factoring company to judge the authenticity of the accounts receivable based only on the information provided by the creditor. If creditors fabricate accounts receivable by forging documents, stamping, etc., it is difficult for the factoring company to verify authenticity. In the event of a future delinquency, the debtor defends the non-existence of the receivables, at which point it is difficult for the factoring company to prove that it has fulfilled its duty of prudent verification and is not aware of the fiction, thus affecting the validity of the contract and even losing the possibility of claiming rights against the debtor.

(2) The refund account cannot be controlled.

Under the covert factoring mode, it is difficult for the creditor of accounts receivable to notify the debtor to take the direct repayment method, and only indirect repayment method can be adopted, I .e. the debtor is not notified to change the repayment account to the factoring company's collection account or co-management account, the repayment account is still kept with the creditor, and the creditor will return the factoring financing money to the factoring company after receiving the accounts receivable. However, the aforementioned model faces the risk that the factoring company will not be able to effectively control the repayment account and effectively monitor the account funds.

Compliance recommendations:

(1) Prudent verification of the authenticity of accounts receivable

The factoring company shall conduct a comprehensive review of the authenticity of the accounts receivable and the underlying contract, and exercise due care to avoid future debtors from raising fictitious accounts receivable defenses. The author's compliance recommendations are as follows:

① The principle of due diligence exemption based on the duty of due diligence

Whether the basic contract has gone through the bidding process, and whether it has legitimacy and reasonableness.

③ The performance of the basic contract, whether the invoices and refund records of the paid price are true, and whether they can correspond to the settlement documents one by one.

④ Whether the works of the basic contract have obtained the project record and four certificates, and whether there is a commencement order.

⑤ Whether the basic contract has been accepted and audited and settled, go to the construction site to check whether the progress is consistent with the submitted progress information.

⑥ Whether the future accounts receivable have been confirmed by the construction unit.

⑦ To conduct a comprehensive assessment of the past transactions between creditors and debtors, credit information and litigation.

(2) Timely conversion of dark factoring to light factoring

First of all, in the factoring contract, it should be clearly agreed that the factoring company can trigger the notice clause when the debtor fails to pay the accounts receivable in full and on time, and the factoring company will issue a notice of assignment of claims as a factoring person (with relevant documents) in order to obtain confirmation of debt repayment.

Secondly, in order to avoid that after the factoring company notifies the debtor of the transfer of accounts receivable, the debtor defends on the grounds that the non-creditor's written notice is not recognized and the transfer of accounts receivable has no legal effect, the factoring company may require the creditor to issue the notice of transfer of accounts receivable in advance and affix the official seal to confirm the retention. At that time, the notice of transfer of accounts receivable of the factoring company and the creditor shall be sent to the debtor at the same time, avoid unnecessary legal risks.

(3) Supervision and control of return accounts and funds

First of all, in practice, if it is impossible to set up a co-management account and maintain control of the account, the factoring company shall specify the breach clause in the factoring contract, agreeing that without the written consent of the factoring company, the creditor shall not negotiate or notify the change of the accounts receivable repayment account or the repayment party, otherwise it shall bear the corresponding liability for breach of contract.

Secondly, the factoring company should attach great importance to the follow-up and verification of the debtor's payment, check the contract performance of both parties to the transaction at any time, and pay attention to the verification of the payment at the collection node agreed in the basic contract. If abnormal payment is found, the factoring company should be immediately transferred to explicit factoring, requiring the debtor to directly perform the payment obligation to the factoring company. If the debtor refuses to pay, the creditor should be promptly required.

According to the "Decision of the State Council on the Implementation of the Unified Registration of Movable Property and Rights Guarantee", starting from January 1, 2021, the unified registration of movable property and rights guarantee will be implemented nationwide. Both parties to the transaction will handle the registration independently through Zhongdeng. Factoring is included, and both parties to the transaction can register the accounts receivable factoring business. In the field of construction engineering, the main function of project price factoring registration publicity is to be able to solve the conflicts between rights of the same nature and between rights of different nature, that is, when there are multiple factoring registrations for the same construction project receivable, the determination of creditor's priority for compensation and when there are multiple rights burdens such as factoring, pledge and creditor's rights transfer at the same time.

First of all, according to the provisions of Article 768 of the Civil Code, "if an accounts receivable creditor enters into multiple factoring contracts for the same accounts receivable, resulting in multiple factoring claims rights, the registered accounts receivable shall be obtained before the unregistered accounts receivable; if they have all been registered, the accounts receivable shall be obtained in the order of registration time; If neither is registered, the accounts receivable are obtained by the agent specified in the notice of assignment that first arrives at the debtor of the accounts receivable; if neither registered nor notified, the accounts receivable are obtained in proportion to the amount of the factoring financing or remuneration for services".

According to the above-mentioned legal provisions, when there are multiple construction project price accounts receivable factoring registration, should be based on the order of registration in the network to determine the order of payment, registration of the first priority of the factoring company to obtain the accounts receivable, registered is better than unregistered.

Secondly, according to the Supreme People's Court on the application<中华人民共和国民法典>Article 66 of the Interpretation on the Guarantee System stipulates: "If the same accounts receivable have factoring, pledge of accounts receivable and assignment of claims at the same time, and the parties claim to determine the order of priority with reference to the provisions of Article 768 of the Civil Code, the people's court shall support it".

According to the above-mentioned legal provisions, when there are multiple different types of rights burdens in the same construction project receivable, that is, factoring, accounts receivable pledge, creditor's rights transfer and other forms coexist and there is a conflict of rights, the above-mentioned provisions of Article 768 of the Civil Code can be directly referred to, that is, the order of compensation can be directly determined according to the time sequence of registration and publicity on the Internet.

Combined with the operational practice of commercial factoring financing and the characteristics of the industry in the field of construction engineering, the possibility of construction engineering accounts receivable being set multiple rights burdens at the same time is high, and some factoring companies do not pay enough attention to factoring registration or do not know about it, which is very easy to produce legal risks. It is recommended that the factoring contract add a clause for factoring registration within a time limit, and at the same time do due diligence before doing factoring business to confirm that there is no factoring registration or other rights burden on the accounts receivable to be transferred, and complete factoring registration before the factoring financing is issued to reduce the legal risks that may arise.

According to the provisions of Article 807 of the Civil Code, in the field of construction projects, the contractor enjoys the right of priority compensation for the price of the construction project, but after the contractor transfers the accounts receivable of the construction project to the factoring company, there is no unified opinion in judicial practice as to whether the priority right of compensation is transferred together.

The negative theory holds that the priority compensation right of the construction project price has exclusive nature. The contractor transfers the construction project price and the priority compensation right of the construction project price is eliminated. Because the priority compensation right of the construction project price is to ensure the normal payment of workers' wages, the creditor can realize the legislative purpose after obtaining the factoring financing, and it is not necessary to give the factoring company the priority compensation right again.

It is affirmed that the right of priority payment of the construction project price, as the subordinate right of the main claim of the construction project price, is also transferred together with the transfer of the main claim, and the corresponding factoring company obtains the subordinate right at the same time of the main claim.