Viewpoint... Commercial factoring business contract risk prevention points.
Published:
2021-11-05
Before the Civil Code came into effect, factoring contracts did not belong to any of the famous contracts listed in the Contract Law. With the rapid development of supply chain finance in recent years, commercial factoring, as a comprehensive financial business integrating financing, accounts receivable collection, accounts receivable management and accounts receivable guarantee, has also received extensive attention. With the promulgation of the Civil Code, Chapter XVI of Title III sets up nine provisions, detailing the definition, content and form of the factoring contract, the validity of fictitious accounts receivable, the subject and manner of notification of the assignment of accounts receivable, and whether there is recourse, making the factoring contract a reputable contract. Therefore, the dispute over the factoring contract has become the 113th cause of action in the Civil Cause of Action, and the agent should strictly follow the provisions of the Civil Code for factoring contracts to avoid contractual risks. The constituent elements of a 1. factoring contract. Prior to the promulgation of the Civil Code, the Tianjin Higher People's Court issued the Minutes of the Trial Committee of the Tianjin Higher People's Court on Several Issues Concerning the Trial of Factoring Contract Disputes in October 2014, which clarified that the legal relationship of factoring should be formed at the same time. The following basic conditions: 1. The factoring company must be a financial institution and a commercial factoring company that can carry out factoring business in accordance with national regulations and approved by the relevant competent authorities; 2. The factoring legal relationship should be premised on the transfer of claims; 3. The factoring agent and the creditor shall sign a written factoring contract; 4. The agent shall provide at least one of the following services: financing, sales sub-account management, accounts receivable collection, credit investigation and evaluation, credit risk control and bad debt guarantee. The aforementioned provisions are summarized in the Civil Code, Article 761 of the Civil Code, which 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 provisions, it can be seen that the two necessary elements for the formation of a factoring contract are: a true assignment of accounts receivable and effective factoring services. Factoring is a kind of comprehensive financing business, compared with traditional financing methods such as borrowing and credit enhancement, the transfer of accounts receivable is the core link, if there is no real transfer of accounts receivable, it may be based on the true intention of both parties to the contract to form a loan contract relationship or guarantee contract relationship and other legal relations. According to the circumstances listed in Article 762 of the Civil Code, the elements of a factoring contract generally include the type of business, scope of service, term of service, contract status of the underlying transaction, information on accounts receivable, factoring financing or remuneration for the service and its payment method, and the factoring is required to provide real factoring services in accordance with the contract. 2. the creditor has a genuine underlying contractual relationship with the debtor that can give rise to a specified receivable Article 763 of the Civil Code states: "Where a creditor of accounts receivable and a debtor make up the accounts receivable as the subject of an assignment and enter into a factoring contract with a factoring agent, the debtor of the accounts receivable may not oppose the factoring agent on the ground that the accounts receivable do not exist, unless the factoring agent knows that the accounts receivable are fictitious." According to the above, if the creditor of the accounts receivable and the debtor make up the underlying contract, the true intention of both parties is to obtain financing from the factoring company, in which case it is necessary to distinguish whether the factoring person knows whether the underlying contract is fictitious. First of all, if the factor does not know the fictitious basic contract between the creditor and the debtor, the factor can continue to demand the debtor to perform the payment obligation of accounts receivable according to the provisions of the Civil Code, that is, the validity of the basic contract does not affect the continued validity of the factoring contract, and then the factor can naturally claim rights against the creditor according to the agreement of the factoring contract. If it is agreed in the factoring contract that the factoring person has the right of recourse, the factoring person can exercise the right; if there is no right of recourse, the factoring person can also exercise the right of revocation based on the creditor's fraud according to the provisions of Article 148 of the Civil Code, requiring the creditor to return the financing funds and compensate for the losses. The author believes that under such circumstances, even if the basic contract and the factoring contract have no legal effect, the factorer may still claim rights against the debtor on the basis of reliance interest protection. Secondly, if the factoring person still enters into a factoring contract with the creditor if he knows the fraud of the creditor and debtor of the account receivable, the factoring person will provide funds and agree on the proceeds when he knows that the account receivable does not exist. The act conforms to the appearance form of the loan and also has the meaning of the loan. Therefore, the legal effect of the act should be judged according to the provisions on the validity of the contract. In such cases, the factoring contract and the underlying contract are invalid because they are not the true intention of the parties to the contract, and whether they are a loan or not depends on the scope of the factoring person's business. According to Article 19 of the Banking Supervision and Administration Law: "No unit or individual may establish a banking financial institution or engage in the business activities of a banking financial institution without the approval of the banking regulatory authority under the State Council." The author believes that this is a mandatory provision of validity. If the factoring person does not have the qualification to issue loans, he will face the risk that the loan contract relationship will not be established. In judicial practice, the court generally decides that both parties to the contract will return it separately, and the creditor will return the principal of factoring financing and add the capital occupation fee calculated by LPR in the same period. At this time, the factoring person may suffer certain losses. 3. due diligence on the underlying accounts receivable Accounts receivable is the core concern of commercial factoring companies to carry out factoring business, whether the corresponding accounts receivable to conduct adequate due diligence determines the degree of protection of the trust interests of the factor. The factor shall conduct due diligence on the authenticity, legal validity, transferability and integrity of rights of the accounts receivable. Since the factoring is not a counterparty to the underlying contract, I believe that the depth of due diligence here is a formal review, and that the factoring is considered to be in good faith as long as the obligation of careful review is fulfilled. Due diligence on accounts receivable should focus on the following: 1, the authenticity of accounts receivable: the agent should focus on verifying the original text of the basic contract, out of storage documents, logistics documents, invoice receipts and other materials, to compare samples, interviews and other ways to judge the authenticity of the above materials. Among them, it is also necessary to pay attention to whether the agreed price, term, type of subject matter, payment terms, etc. are significantly different from normal trading habits, whether they are in line with industry practice, and whether different materials can be confirmed by each other to further judge the authenticity of the underlying transaction. It should be noted that future accounts receivable, I .e. accounts receivable that have not yet been formed, may also be classified as factoring under article 761 of the Civil Code. In such cases, the factoring agent should use a higher standard to verify whether the accounts receivable are predictable, whether the payment subject, type, amount and other relevant conditions of the accounts receivable are determined, and if necessary, the debtor needs to give clear confirmation or the creditor to guarantee the credit to prevent the risk of performance of the accounts receivable. 2. Legal validity of accounts receivable: the factoring agent needs to carefully verify the legal validity of the formation of accounts receivable, it is necessary to investigate whether the parties to the basic contract have the qualified civil and commercial subject qualification, whether they have the business qualification to handle the business agreed in the basic contract, whether the basic contract business is in line with the relevant provisions of laws and regulations, whether it will infringe upon the legitimate rights and interests of any third party, and whether there are other defects that lead to the invalidity, revocability and non-establishment of the contract. 3. Transferability of accounts receivable: The factoring person shall verify whether the accounts receivable formed as a result of the underlying contract are transferable, and whether the factoring person can claim the performance of the debt directly to the debtor when the specific circumstances stipulated in the factoring contract occur. In this case, the focus is on verifying whether the receivable has been pledged, whether there is an agreement to prohibit the assignment of the claim, whether there is a debtor's claim to set off the receivable, and whether there are other third parties claiming the receivable that result in the receivable not being assigned. 4. Integrity of accounts receivable: The factorer shall verify whether the creditors of the underlying contract have full ownership and corresponding ancillary rights to the accounts receivable, and that there are no restrictions on the rights of debt set-off, counterclaims claimed by the debtor, damages, pledges, etc. The agent shall obtain a confirmation of the accounts receivable jointly issued by the debtor and the creditor to clarify whether the debtor is in dispute with the payment. In summary, the promulgation of the Civil Code has made factoring contracts a well-known contract and has made clear provisions for factoring business. Commercial factoring companies should conduct a comprehensive review of all aspects from the constituent elements of factoring contracts, the real contractual relationship between the two parties to the basic contract, and the legal compliance of accounts receivable, so as to avoid contract risks.
Before the Civil Code came into effect, factoring contracts did not belong to any of the famous contracts listed in the Contract Law. With the rapid development of supply chain finance in recent years, commercial factoring, as a comprehensive financial business integrating financing, accounts receivable collection, accounts receivable management and accounts receivable guarantee, has also received extensive attention. With the promulgation of the Civil Code, Chapter XVI of Title III sets up nine provisions, detailing the definition, content and form of the factoring contract, the validity of fictitious accounts receivable, the subject and manner of notification of the assignment of accounts receivable, and whether there is recourse, making the factoring contract a reputable contract. Therefore, the dispute over the factoring contract has become the 113th cause of action in the Civil Cause of Action, and the agent should strictly follow the provisions of the Civil Code for factoring contracts to avoid contractual risks.
The constituent elements of a 1. factoring contract.
Prior to the promulgation of the Civil Code, the Tianjin Higher People's Court issued the Minutes of the Trial Committee of the Tianjin Higher People's Court on Several Issues Concerning the Trial of Factoring Contract Disputes in October 2014, which clarified that the legal relationship of factoring should be formed at the same time. The following basic conditions:
1. The factoring company must be a financial institution and a commercial factoring company that can carry out factoring business in accordance with national regulations and approved by the relevant competent authorities;
2. The factoring legal relationship should be premised on the transfer of claims;
3. The factoring agent and the creditor shall sign a written factoring contract;
4. The agent shall provide at least one of the following services: financing, sales sub-account management, accounts receivable collection, credit investigation and evaluation, credit risk control and bad debt guarantee.
The aforementioned provisions are summarized in the Civil Code, Article 761 of the Civil Code, which 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 provisions, it can be seen that the two necessary elements for the formation of a factoring contract are: a true assignment of accounts receivable and effective factoring services. Factoring is a kind of comprehensive financing business, compared with traditional financing methods such as borrowing and credit enhancement, the transfer of accounts receivable is the core link, if there is no real transfer of accounts receivable, it may be based on the true intention of both parties to the contract to form a loan contract relationship or guarantee contract relationship and other legal relations. According to the circumstances listed in Article 762 of the Civil Code, the elements of a factoring contract generally include the type of business, scope of service, term of service, contract status of the underlying transaction, information on accounts receivable, factoring financing or remuneration for the service and its payment method, and the factoring is required to provide real factoring services in accordance with the contract.
2. the creditor has a genuine underlying contractual relationship with the debtor that can give rise to a specified receivable
Article 763 of the Civil Code states: "Where a creditor of accounts receivable and a debtor make up the accounts receivable as the subject of an assignment and enter into a factoring contract with a factoring agent, the debtor of the accounts receivable may not oppose the factoring agent on the ground that the accounts receivable do not exist, unless the factoring agent knows that the accounts receivable are fictitious."
According to the above, if the creditor of the accounts receivable and the debtor make up the underlying contract, the true intention of both parties is to obtain financing from the factoring company, in which case it is necessary to distinguish whether the factoring person knows whether the underlying contract is fictitious. First of all, if the factor does not know the fictitious basic contract between the creditor and the debtor, the factor can continue to demand the debtor to perform the payment obligation of accounts receivable according to the provisions of the Civil Code, that is, the validity of the basic contract does not affect the continued validity of the factoring contract, and then the factor can naturally claim rights against the creditor according to the agreement of the factoring contract. If it is agreed in the factoring contract that the factoring person has the right of recourse, the factoring person can exercise the right; if there is no right of recourse, the factoring person can also exercise the right of revocation based on the creditor's fraud according to the provisions of Article 148 of the Civil Code, requiring the creditor to return the financing funds and compensate for the losses. The author believes that under such circumstances, even if the basic contract and the factoring contract have no legal effect, the factorer may still claim rights against the debtor on the basis of reliance interest protection. Secondly, if the factoring person still enters into a factoring contract with the creditor if he knows the fraud of the creditor and debtor of the account receivable, the factoring person will provide funds and agree on the proceeds when he knows that the account receivable does not exist. The act conforms to the appearance form of the loan and also has the meaning of the loan. Therefore, the legal effect of the act should be judged according to the provisions on the validity of the contract. In such cases, the factoring contract and the underlying contract are invalid because they are not the true intention of the parties to the contract, and whether they are a loan or not depends on the scope of the factoring person's business. According to Article 19 of the Banking Supervision and Administration Law: "No unit or individual may establish a banking financial institution or engage in the business activities of a banking financial institution without the approval of the banking regulatory authority under the State Council." The author believes that this is a mandatory provision of validity. If the factoring person does not have the qualification to issue loans, he will face the risk that the loan contract relationship will not be established. In judicial practice, the court generally decides that both parties to the contract will return it separately, and the creditor will return the principal of factoring financing and add the capital occupation fee calculated by LPR in the same period. At this time, the factoring person may suffer certain losses.
3. due diligence on the underlying accounts receivable
Accounts receivable is the core concern of commercial factoring companies to carry out factoring business, whether the corresponding accounts receivable to conduct adequate due diligence determines the degree of protection of the trust interests of the factor. The factor shall conduct due diligence on the authenticity, legal validity, transferability and integrity of rights of the accounts receivable. Since the factoring is not a counterparty to the underlying contract, I believe that the depth of due diligence here is a formal review, and that the factoring is considered to be in good faith as long as the obligation of careful review is fulfilled.
Due diligence on accounts receivable should focus on the following:
1, the authenticity of accounts receivable: the agent should focus on verifying the original text of the basic contract, out of storage documents, logistics documents, invoice receipts and other materials, to compare samples, interviews and other ways to judge the authenticity of the above materials. Among them, it is also necessary to pay attention to whether the agreed price, term, type of subject matter, payment terms, etc. are significantly different from normal trading habits, whether they are in line with industry practice, and whether different materials can be confirmed by each other to further judge the authenticity of the underlying transaction.
It should be noted that future accounts receivable, I .e. accounts receivable that have not yet been formed, may also be classified as factoring under article 761 of the Civil Code. In such cases, the factoring agent should use a higher standard to verify whether the accounts receivable are predictable, whether the payment subject, type, amount and other relevant conditions of the accounts receivable are determined, and if necessary, the debtor needs to give clear confirmation or the creditor to guarantee the credit to prevent the risk of performance of the accounts receivable.
2. Legal validity of accounts receivable: the factoring agent needs to carefully verify the legal validity of the formation of accounts receivable, it is necessary to investigate whether the parties to the basic contract have the qualified civil and commercial subject qualification, whether they have the business qualification to handle the business agreed in the basic contract, whether the basic contract business is in line with the relevant provisions of laws and regulations, whether it will infringe upon the legitimate rights and interests of any third party, and whether there are other defects that lead to the invalidity, revocability and non-establishment of the contract.
3. Transferability of accounts receivable: The factoring person shall verify whether the accounts receivable formed as a result of the underlying contract are transferable, and whether the factoring person can claim the performance of the debt directly to the debtor when the specific circumstances stipulated in the factoring contract occur. In this case, the focus is on verifying whether the receivable has been pledged, whether there is an agreement to prohibit the assignment of the claim, whether there is a debtor's claim to set off the receivable, and whether there are other third parties claiming the receivable that result in the receivable not being assigned.
4. Integrity of accounts receivable: The factorer shall verify whether the creditors of the underlying contract have full ownership and corresponding ancillary rights to the accounts receivable, and that there are no restrictions on the rights of debt set-off, counterclaims claimed by the debtor, damages, pledges, etc. The agent shall obtain a confirmation of the accounts receivable jointly issued by the debtor and the creditor to clarify whether the debtor is in dispute with the payment.
In summary, the promulgation of the Civil Code has made factoring contracts a well-known contract and has made clear provisions for factoring business. Commercial factoring companies should conduct a comprehensive review of all aspects from the constituent elements of factoring contracts, the real contractual relationship between the two parties to the basic contract, and the legal compliance of accounts receivable, so as to avoid contract risks.
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