Viewpoint... Analysis of the legal issues of factoring contract disputes after the implementation of the Civil Code.

Published:

2022-03-16

Introduction With the gradual scale of factoring business, disputes involving factoring contracts have gradually emerged. Since the dispute of factoring contract is a relatively new type of dispute, generally involving two contracts and three parties between the factoring agent and the creditor of accounts receivable under the factoring contract, and between the creditor of accounts receivable and the debtor under the basic contract, there is a gradual cognitive maturity process for the handling of the dispute involving factoring contract from the cause of action, jurisdiction, subject to the handling of the rights and obligations of the entity, its positioning has gone through from a loan contract dispute or an unnamed contract dispute to a consensus positioning of an unnamed contract dispute. After the Civil Code came into force, factoring contracts were regulated as a typical class of well-known contracts, providing a direct source of law for judicial decisions. This paper only discusses the legal issues related to the rights of recourse factors. The object and scope of the rights claimed by the 1. recourse agent. Article 766 of the Civil Code: Where the parties agree to have recourse factoring, the factoring agent may claim the return of principal and interest on factoring financing or the repurchase of the accounts receivable claim from the accounts receivable creditor, or claim the accounts receivable claim from the accounts receivable debtor. If the factoring agent claims an accounts receivable claim from the accounts receivable debtor, and if there is a surplus after deducting the principal and interest of the factoring financing and related expenses, the surplus shall be returned to the accounts receivable creditor. It can therefore be concluded that the agent may claim: 1, the agent to the creditors of accounts receivable to claim the right to repurchase accounts receivable, that is, to require creditors to "claim the right to the debtor's accounts receivable" to buy back; 2. The factoring agent separately claims recourse to the accounts receivable creditor for the principal and interest of the factoring financing, I .e., the creditor is required to continue to perform the obligation of settlement against the balance of the principal and interest of the factoring financing that the creditor fails to obtain settlement from the debtor; 3. The factor separately claims to the debtor of the accounts receivable within the scope of the accounts receivable that has been transferred but not paid, that is, the right to require the debtor to pay the accounts receivable in full and on time in accordance with the agreement of the underlying transaction contract. Can the 2. factor's recourse to the creditor and the debtor's claim coexist? In the course of the performance of a recourse factoring contract, the factoring agent, in order to maximize the recovery of the claim, often chooses to take the creditor and debtor of the accounts receivable as the defendant and file a lawsuit in the people's court together. With regard to the manner and order in which both creditors and debtors are liable when they are sued at the same time, both referees have expressed two views: first, the debtor of accounts receivable bears the first-in-the-line payment responsibility. A supplementary relationship is established between the factor's claim for payment to the debtor and the recourse to the creditor, and the creditor assumes supplementary liability to the extent that the debtor cannot be paid. Second, the factor does not extinguish the claim for payment of accounts receivable by claiming recourse. [Guiding Case] (2018) Supreme Famin Re -192 The gist of the decision: If the factor has not been paid off at the expiration of the agreed repayment period, the factor has the right not only to request the debtor of the underlying contract to pay off its debts, but also to recover from the creditors of the underlying contract, and the debtor of the accounts receivable bears the first-in-line repayment responsibility, and the creditor bears the corresponding supplementary liability. The court held that: in this case, the Bank of China New District Branch is at the same time to the Golden Eagle Company to claim recourse, but also to Tianhui Company, Huale Company to claim accounts receivable claims. Although the Bank of China New District Branch claimed to multiple debtors at the same time based on different legal relationships, they were all within the scope of the factoring legal relationship with only one purpose, namely, to recover the factoring financing funds provided to Golden Eagle. Therefore, the case should be consolidated and the order and scope of liability of each debtor should be determined on the basis of the legal relationship between the parties. The court of second instance rejected BOC New District Sub-branch's lawsuit against Tianhui Company and Huale Company and Huale Company's counterclaim against BOC New District Sub-branch on the grounds that the loan guarantee contract dispute and the creditor's rights transfer dispute were not based on the same legal fact and the same legal relationship and could not be tried together under the circumstance that the handling did not conform to the characteristics of factoring legal relationship and separated the internal connection between various legal relationships, this increases the litigation burden of the parties and is not conducive to the integrated settlement of disputes, which is corrected by this court. With regard to the order and scope of responsibility of each debtor, since Tianhui Company and Huale Company are the payers of the accounts receivable, they shall first assume responsibility for the payment of the transferred portion of the accounts receivable to the Bank of China New District Branch; if the relevant amount cannot be paid off, Golden Eagle Company shall continue to assume supplementary liability to the Bank of China New District Branch. Can the 3. factoring's claim to the creditor and the claim to the debtor coexist? There is a dispute in practice at present. Viewpoint 1: If a factoring agent sues a creditor in a separate case to claim a repurchase claim, the factoring agent's claim to the accounts receivable creditor for a repurchase right cannot coexist with the claim to the accounts receivable debtor. [Guiding Case] (2017) Supreme Fa Min Shen No. 132 The gist of the decision: Because the factor has required the creditor to assume the repurchase liability through the proceedings, the corresponding debtor's accounts receivable is transferred to the creditor, the creditor obtains the part of the claim, the debtor and the factor corresponding to the repayment obligation should be waived, the factor has no right to claim the accounts receivable from the debtor. The court held that, according to the Agreement on Factoring and the Application for Factoring Financing, the case was buyout factoring, and Pudong Development Bank was granted the accounts receivable claims of Bay Day against Zhonglian, and Pudong Development Bank became a creditor of Zhonglian. Thereafter, Wantian issued a Letter of Commitment to Pudong Development Bank, promising that if Zoomin fails to fulfill its payment obligations in full within the maturity date of the financing, Wantian will assume repurchase responsibility for the accounts receivable transferred to Pudong Development Bank under the Factoring Agreement, and the subject of its repurchase is still the claim on the accounts receivable. Therefore, whether Pudong Development Bank requests debt settlement from Zhonglian Company or repurchase from Wantian Company, it is based on the same accounts receivable claim. In the absence of a separate agreement between the parties, Pudong Development Bank can only choose one claim. According to the ascertained facts, Pudong Development Bank has requested Wantian Company to bear the repurchase responsibility for the accounts receivable creditor's rights in another case, and the effective judgment of the other case has already supported its claim. Under such circumstances, Pudong Development Bank no longer enjoys the accounts receivable creditor's rights against Zhonglian Company, so Pudong Development Bank has sued Zhonglian Company for the lack of claim basis for the debts in this case. Viewpoint 2: Whether the factor can claim a repurchase right from the accounts receivable creditor and a claim from the accounts receivable debtor can coexist depends on whether the action brought by the factor in a separate case should be found to have exercised the right to terminate the contract of assignment of claims. [Guiding Case] (2017) Supreme Famin Re -164 Referee gist: If the factor advocates the creditor of the underlying transaction to repurchase the accounts receivable, it is essentially advocating the termination of the factoring contract. After the termination of the factoring contract, the factoring ceases to have the status of a creditor of the receivables and it no longer has the right to claim payment of the receivables from the debtor of the underlying transaction, I .e., the factoring's repurchase claim against the creditor cannot coexist with its claim against the debtor. If the factor claims to the creditor in a separate case that it is not a repurchase of the receivables, but a return of the factoring financing, the factor will still have the right to claim payment of the receivables from the debtor until the principal and interest of the factoring financing are fully paid. However, in the case of the factor claiming rights to both the creditor and the debtor, the satisfaction or partial satisfaction of the debt by either party of the creditor and the debtor shall be relieved of the other party's obligation to pay off accordingly, so as to avoid the factor's double payment of the same claim. The court held: the question of whether Zhuhai China Resources Bank's right to anti-assignment of accounts receivable against Guangzhou Dayou Company could coexist with its claim against Jiangxi Fuel Company. The legal effect of the agent's anti-assignment of claims to the creditor's rights shall be recognized in accordance with the law as the termination of the contract of assignment of claims and the return of claims to the transferor, so the anti-assignment of accounts receivable shall be adjusted by the relevant provisions of the General Provisions of the the People's Republic of China Contract Law on contract termination. The agreement in the Domestic Factoring Contract that after Guangzhou Dayou Company returns the factoring financing funds and related outstanding expenses, all rights related to the accounts receivable shall also be transferred back at the same time, and Zhuhai China Resources Bank has the right to notify Guangzhou Dayou Company of the anti-transfer of creditor's rights in the case of Jiangxi Fuel Company's failure to perform its repayment obligations shall be interpreted as the agreed termination conditions of the creditor's rights transfer contract involved in the case. Therefore, in the case of the fulfillment of the termination conditions agreed in the contract, if Zhuhai China Resources Bank counter-transfers the creditor's rights to Guangzhou Dayou Company, it no longer has the creditor status of Jiangxi Fuel Company after the termination of the creditor's rights transfer contract, and its right basis for asking Jiangxi Fuel Company to pay off the debts no longer exists, therefore, Zhuhai China Resources' right of anti-transfer to Guangzhou Dayou Company and its claim to Jiangxi Fuel Company cannot coexist in legal nature. Accordingly, whether Zhuhai China Resources Bank's claim to pay off the debts of Jiangxi Fuel Company in this case can be supported depends on whether its separate lawsuit should be deemed to have exercised the right to terminate the contract of assignment of claims and return the claims to Guangzhou Dayou Company. In this case, the court held that in the process of claiming the rights of Zhuhai China Resources Bank, there was no written document to prove that it had expressed the intention of anti-transfer of claims to Guangzhou Dayou Company. Moreover, judging from the actual situation of the series of litigation actions carried out by Zhuhai China Resources Bank, its real meaning is to insist that Jiangxi Fuel Company and Guangzhou Dayou Company bear the debts at the same time. The core demand is to require Guangzhou Dayou Company and Jiangxi Fuel Company to jointly repay the loans owed, which has never included the intention of returning the creditor's rights to Guangzhou Dayou Company. Therefore, the Court found that the rights claimed by Zhuhai China Resources Bank in a separate lawsuit were in nature a right of recourse to require Guangzhou Dayou Company to repay the loan, not a counter-assignment of the claim. Jiangxi Fuel Company's lawsuit that Zhuhai China Resources Bank has transferred the accounts receivable involved in the case to Guangzhou Dayou Company has no corresponding factual basis, and this court will not accept it. The original judgment did not conform to the actual situation of the case that Zhuhai China Resources Bank had actually exercised the right of action against Guangzhou Dayou Company and that it no longer enjoyed the accounts receivable claim against Jiangxi Fuel Company. If Zhuhai China Resources Bank's real intention was to terminate the creditor's rights transfer contract, it would no longer insist on filing a lawsuit in this case claiming that it no longer had the right, and the court corrected the determination. Conclusion The last two cases are basically the same. The key lies in whether the factor has exercised the repurchase right. If it sues the creditor alone, the trial practice will tend to think that it has exercised the repurchase right and no longer enjoys the claim against the debtor. If the factor sues both the creditor and the debtor, the judge generally tends to think that the factor is exercising its claim against the debtor and its recourse against the creditor. In the event that the debtor fails to pay the principal and interest on the accounts receivable in full and on time, it is more advantageous for the factor to claim recourse to the creditor for the factoring financing rather than a repurchase claim.

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