Suitability of commercial factoring for future accounts receivable

By Xu Rundong, AnJie Broad Law Firm
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Article 761 of the Civil Code allows creditors to use future accounts receivable (AR) for factoring transactions, supporting and promoting the factoring industry. This provision exemplifies the principle of encouraging transactions within the realm of civil and commercial matters.

The Civil Code lacks a clear definition of future AR, resulting in varying criteria and operational standards in practice. Consequently, certain factoring companies have encountered issues where an entire commercial factoring relationship is negatively assessed due to the determination that the transferred subject matter does not exist.

Given that the Civil Code allows factoring transactions with future AR, the question of what criteria future AR must meet to satisfy legal evaluation pertains to the appropriate boundaries of the subject matter of factoring contracts.

Q: Are there different requirements for AR in different regulatory fields?

Xu Rundong, AnJie Broad Law Firm
Xu Rundong
AnJie Broad Law Firm

A: AR under the pledge. The concept of AR first emerged in the Property Law enacted in March 2007, but a clear definition and scope were not provided. In September 2007, the People’s Bank of China introduced the Measures for Registration of the Pledge of AR as a complementary rule to the Property Law, providing the initial clarification of the definition and scope of AR.

Importantly, these measures already allowed for the pledge of future monetary claims. As the practice of AR pledge financing developed, a wider variety of AR was used for financing purposes. In 2017, the central bank revised the measures, adjusting the monetary claims of AR by excluding some claims, including “the payment claim right prohibited from transfer by laws and administrative regulations”.

Specific types of listed AR were further refined. Following this revision, the central bank made no further adjustments to the definition of AR under the pledge. Therefore, the definition has essentially become fixed.

AR in commercial factoring. On 27 June 2012, the Ministry of Commerce issued the Notice on the Work Related to the Pilot Commercial Factoring, marking the beginning of China’s commercial factoring industry.

In March 2016, the Ministry of Commerce issued the Administrative Measures for Commercial Factoring Enterprises (Trial) which, for the first time, provided clear guidelines on AR. Due to the differentiation between commercial bank factoring and commercial factoring in China, the China Banking Regulatory Commission (CBRC) issued the Interim Measures for the Administration of Commercial Bank Factoring Business in 2014.

Upon comparison, apart from the addition of the clause “excluding claims formed due to the provision of financial services”, the definition of AR in the Ministry of Commerce’s regulations is almost identical to the CBRC’s interim measures.

In 2018, after regulatory responsibilities for commercial factoring companies were transferred from the Ministry of Commerce to the China Banking and Insurance Regulatory Commission (CBIRC), the CBIRC issued the Notice on Strengthening the Supervision and Management of Commercial Factoring Enterprises (Document No. 205) in 2019.

However, it did not further clarify AR in the commercial factoring business. In the author’s opinion, since the CBIRC’s regulatory responsibilities were inherited from the Ministry of Commerce, there is a certain continuity in their management concepts and logic. Therefore, the reference to the AR in Document No. 205 can be considered in line with the above-mentioned administrative measures.

Q: How many types of future AR are there?

A: According to legal theory, the content of a debt includes rights, obligations and related authorities. The authorities of a debt encompass the right to request payment, receive payment, request protection, and dispose.

A debt with all these authorities is considered a complete debt, while a debt lacking any of these authorities is an incomplete debt. Based on the different stages of performance in contract fulfilment, future AR can be classified into the following types:

  • Receivables for which a contract has been signed but the creditor’s obligations have not been fully fulfilled;
  • Receivables for which a contract has not yet been signed, but which have the basis for contract formation; and
  • Receivables for which a contract has not been signed, and that do not have the basis for contract formation.

Q: What are the recent judicial review standard?

A: From a judicial perspective, the validity of factoring relationships is primarily assessed on whether future AR possess transferability. The determination of transferability is based on two main aspects: certainty and “expectability”.

First, there is relative certainty. Future AR with a signed contract, but which have not yet fulfilled the obligations, have a higher level of certainty because the creditor’s payment conditions, such as the amount and term, are generally established. Similarly, for contracts that have not been signed but have the basis for contract formation and transaction, the commercial practices, the debtor, the amount and the payment term also possess a relative level of certainty.

Second, there is a higher level of expectability, which refers to the possibility of future AR transiting from non-existent or incomplete debts to complete debts. When a creditor continually provides the same goods or services in a specific industry over a period of time, it consistently generates future AR. In such cases, the creditor has a reasonable expectation of future AR, which becomes an expectation right recognised and protected by law.

Finally, there is a close association. In situations where the future AR possesses certainty and a higher level of expectability, the absence of an association between the AR and the factoring contract may lead to the court’s ruling that there is no legally binding factoring relationship between the parties.

Q: What are the recommendations for commercial factoring operations?

A: In practice, it is advisable to focus on the following aspects:

  • It is crucial to verify the authenticity, validity and certainty of future AR;
  • It is necessary to conduct thorough due diligence on the daily business operations of creditors;
  • The factoring contract should include comprehensive provisions regarding future AR, covering specific details such as price terms, settlement methods, receiving accounts and account numbers, among others;
  • For future AR from operating income, establish a dedicated bank account with joint control; and
  • It is essential to promptly register the transfer/factoring of AR on the Unified Registration and Publicity System for Movable Assets Financing of the Credit Reference Centre of the People’s Bank of China, and provide as detailed a description as possible of the future AR in the registration record.

Xu Rundong is a partner at the AnJie Broad

AnJie Broad Law Firm

AnJie Broad Law Firm

19/F Tower D1, Liangmaqiao Diplomatic Office Building
19 Dongfang East Road

Chaoyang District
Beijing 100600, China

Tel: +86 10 8567 5988

Fax: +86 10 8567 5999


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