多语言
  • Index
  • News
  • Information Details
  • JAVY Opinion |Financial Law Review: on the effectiveness and recourse of factoring contract from the typical cases of the Supreme Court

    Release Time:2022-04-24

    嘉律师.gif

    Introduction

    At present, our country's factoring business is developing at an extremely high speed, and the resulting legal disputes are also increasing day by day. For example, in judicial practice, it is frequently exposed that some companies join forces to defraud banks and obtain financing by fictitious claims and debts. Factoring agents need to be highly vigilant in this regard. However, local courts do not have uniform and clear standards for the "duty of care" of factoring parties, resulting in the phenomenon of "different judgments in the same case" from time to time. For this reason, the author selects several typical cases of the Supreme Court from judicial practice, in order to inspire factorers in terms of risk prevention and legal remedies.


    According to the report of the China Banking Association, China has become the country with the largest volume of factoring business in the world and the largest export factoring market in the world, with the volume of factoring business leading the world for the fourth consecutive year. At the same time, the many legal risks exposed by the vigorous development of our country's factoring business cannot be underestimated. In recent years, the cases of factoring disputes have frequently been published by the Supreme Court, of which difficult cases involving a huge amount of money and many parties account for a considerable proportion. The focus of disputes in such cases is mostly on whether the legal relationship of factoring is established, and how the relevant rights holders can realize the right of recourse or the right of recovery. In this regard, readers can get a glimpse of authoritative judicial views from the following typical cases.

     

    Henan Qichun Petroleum Distribution Group Co., Ltd. and Industrial and Commercial Bank

    of China Co., Ltd. Yan'an Branch Financial Loan Contract Dispute Case

    [(2020) Supreme Court No. 155]


    Summary of the Case


    On August 7, 2014, Baojiang Petrochemical Company, ICBC Yan'an Branch and Qichun Company signed the "Domestic Factoring Business Cooperation Agreement". On the same day, Qichun Company confirmed that Baojiang Petrochemical Company has 62.53 million yuan of accounts receivable creditor's right to it through the "Confirmation Letter of Agreeing to Handling Domestic Factoring Financing". On August 13, ICBC Yan'an Branch signed the "Domestic Factoring Business Contract" with Baojiang Petrochemical Company, and agreed to transfer the above-mentioned accounts receivable creditor's rights and related rights to ICBC Yan'an Branch, and ICBC Yan'an Branch gave Baojiang Petrochemical Company 50 million yuan to conduct factoring financing. Then Baojiang Petrochemical Company filed for bankruptcy in Xi'an Intermediate Court in 2017 and was accepted.

    ICBC Yan'an Branch sued to the court, demanding repayment from Qichun Company and Baojiang Petrochemical Company. The court of first instance ruled that the defendant should pay the debt. Qichun Company refused to accept it and appealed to the Supreme Court, claiming that (1) the nature of the legal relationship in this case was a financial loan contract, not a factoring contract; (2) the accounts receivable involved in the case had been paid off before the factoring contract was concluded, and the so-called accounts receivable are fictitious, so the factoring contract is invalid; (3) The "Domestic Factoring Business Cooperation Agreement" involved in the case does not stipulate that ICBC Yan'an Branch has the right to claim the accounts receivable from Qichun Company, and cannot request Qichun Company repayment.


    In this regard, the Supreme Court stated:

    1. Regarding the nature of the contract in this case. The three parties signed the "Domestic Factoring Business Cooperation Agreement", and Qichun Company confirmed that it had received the transfer of the accounts receivable involved in the case through the "Confirmation Letter of Agreeing to Handling Domestic Factoring Financing" and the "Notice of Transfer of Accounts Receivable Creditor's Rights (Receipt)" After the notice, ICBC Yan'an Branch and Baojiang Petrochemical Company entered into a "Domestic Factoring Business Contract" to issue financing to Baojiang Petrochemical Company. The above facts show that the three parties have established a factoring legal relationship.


    2. Regarding the validity of the factoring contract. Qichun Company could not prove that ICBC Yan'an Branch knowingly fabricated it, so its act of confirming the real existence of accounts receivable constituted fraud. As the defrauded party, ICBC Yan'an has the right to choose not to cancel the contract, but to request to continue to perform the contract. Therefore, the defense of Qichun Company on the grounds that the contract is invalid cannot be established.


    3. Regarding whether Qichun Company is the debtor in this case. Failure to agree on the right of recourse is not the same as negation. The legal relationship of the factoring contract in this case is determined by the overall framework composed of four documents, and individual documents cannot be understood in a one-sided and fragmented manner. In the absence of a clear negative, ICBC Yan'an Branch, as the transferee of the accounts receivable, of course has the right of recourse. To sum up, the Supreme Court rejected the appeal and upheld the original judgment.


    Enlightenment: The Civil Code divides the factoring business into factoring with recourse and factoring without recourse. A factor with a factoring contract with recourse can claim to creditors for the return of the principal and interest of the factoring financing or for repurchase accounts receivable claims. Accounts receivable claims can also be asserted against the debtor. On the other hand, if the factoring contract with no recourse factoring contract cannot collect the receivables from the debtor after the receivables expire, they can only bear the risk of bad debts. In our country's current judicial practice, the courts tend to think that the non-recourse factoring contract needs to be clearly stipulated, otherwise it is generally treated as a recourse factoring.

     1656644598645.png

    China Aluminum Henan International Trade Co., Ltd. and China Construction Bank Corporation Zhengzhou Jinshui Sub-branch Contract Dispute Case

    [(2020) Supreme Court No. 2966]


    Summary of the Case


    On March 20, 2015, CCB Jinshui Sub-branch and Chinalco signed the "Domestic Factoring Contract with Recourse", and CCB Jinshui Sub-branch issued the "Recourses Receivables Transfer Application" issued by Chinalco with recourse. The domestic factoring advance payment totaled 341.7 million yuan, with a term of 6 months. The debtor issued a receipt that it knew that the creditor's rights of the accounts receivable had been transferred, but did not fully and timely perform the repayment obligations.


    CCB Jinshui Sub-branch then sued to the court, and the court of first instance ruled that the debtor should perform the debt to CCB Jinshui Sub-branch, and Chinalco was responsible for the payment of the unfulfilled part. After Chinalco appealed, the second instance upheld the original judgment, but made some adjustments taking into account the new facts after the first instance judgment. Chinalco refused to accept it and lodged a complaint, claiming that the sale and purchase contract in this case was in fact a case of “delivery of orders but not goods”, and that the factoring contract was invalid due to conspiracy to express false intentions. The true intention is that it is a factoring contract without recourse, and the judgment is required to be changed.


    The Supreme Court held that: Chinalco was in an active position in the performance of the purchase and sale contract, and was in a dominant position in the use of factoring funds, and was not under the leadership and control of the Jinshui Sub-branch of CCB. Regarding a series of sales contracts that Chinalco calls "going on orders and not buying goods", none of the debtors claimed that the accounts receivable did not exist. The reason why the Jinshui Sub-branch of CCB knew that Chinalco was conspiring to express false intentions and claimed that the factoring contract was invalid could not be established. Although Chinalco stated that its original intention was to sign a non-recourse factoring contract, it did not declare the revocation or request to terminate the recourse factoring contract signed by both parties. Therefore, this claim cannot be established. The company will undertake supplementary repayment responsibility for debts. In summary, the Supreme Court rejected the retrial application.


    Implications: Although the basis of the legal relationship of factoring is the accounts receivable arising from the real underlying transaction, if the factoring party has performed due diligence and has good faith belief that the accounts receivable are genuine. Even if the creditor-debtor relationship involved in the case is actually fictitious, in practice the court tends to determine that the legal relationship of factoring is legally established, thus supporting the factor's claim.

     

    Kailuan (Group) Co., Ltd. and Kailuan (Group) Co., Ltd. Donghuantuo Mining Branch Dispute over a Financial Loan Contract

    [(2020) Supreme Court No. 714]

     

    Summary of the Case


    In order to renovate the old local area, the Hancheng Town Government signed the "Relocation Agreement" with the Donghuantuo Branch of Kailuan Group and the Hanxi Association. Subsequently, Donghuantuo Branch and Jinrunwang Company signed the "Construction Agreement". Jin Runwang Company applied for factoring financing to Hua Xia Bank by transferring the beneficiary rights of accounts receivable under the above-mentioned project funds. Hua Xia Bank handled 150 million yuan of factoring financing for Jin Runwang Company with a term of one year. During the duration of the business, Jin Runwang Company collected a total of 120 million yuan through the special factoring account opened in Hua Xia Bank, but the funds were transferred to the general settlement account of Jin Runwang Company after being credited, and were not used to repay the factoring financing.

     

    Later, due to the poor management of Jinrunwang Company, the company defaulted on its debts and could not repay the due factoring financing. The bank filed a lawsuit, requiring Jinrunwang Company, Hanxi Association, and Donghuantuo Branch to fulfill the responsibility for payment of accounts receivable and repay the principal and interest of the factoring financing. At the time of the lawsuit, because Jinrunwang Company and Hanxi Association had no actual ability to perform, whether Donghuantuo Branch could bear the repayment liability became the focus of the lawsuit. The court of first instance supported Hua Xia Bank's claim and required Dong Huantuo Branch to assume the responsibility for repayment of accounts receivable. Then Dong Huantuo Branch refused to accept the first-instance judgment and appealed to the Supreme Court.

     

    The Supreme People's Court held that: the project progress payment recorded in the "Project Settlement Schedule", "Information Statement" and current documents and other evidence materials cannot draw the conclusion that Donghuantuo Branch has such accounts receivable in this case, and The specific amount of accounts receivable cannot be accurately determined, which cannot support Hua Xia Bank's claim. At the same time, the court clarified to this article that "the bank, as a professional institution, fails to notify the debtor of the accounts receivable in a timely manner and obtain its confirmation in the factoring business as required, and the resulting commercial risk should be borne by itself." Final judgment: Dong Huantuo Branch was not the debtor of Jin Runwang Company's transfer of accounts receivable to Hua Xia Bank, and there was no direct creditor-debt relationship between Hua Xia Bank and Dong Huantuo Branch, so the request of judgment made in the first instance was revoked, that is, Dong Huantuo Branch will not be liable for repayment.


    Implications: Factoring legal relationships usually involve three parties, namely the factoring party, the creditor of the accounts receivable, and the debtor. For the debtor, if the creditor's rights are transferred without notice, the creditor's rights transfer stipulated in the factoring contract has no legal effect on the debtor, which means that the debtor is not bound by the legal relationship of factoring and does not need to bear responsibility. In this case, the creditor of the accounts receivable has no actual ability to perform, and the court has ruled that the debtor is not liable, that is, the huge loss of the bank will be difficult to recover, and the factor should learn a profound lesson from it.

     

    Financial loan contracts between Harbin Qiulin Group Co., Ltd. and Hua Xia Bank Co., Ltd. Tianjin Branch

    [(2020) Supreme Court No. 907]


    Summary of the Case

     

    On December 17, 2018, Hua Xia Bank and Longtai Company signed the "Non-recourse Domestic Factoring Business Contract". Longtai Company guarantees that it has fulfilled its obligations under the corresponding business contract and can provide corresponding certificates. On the same day, the two parties signed three more "Bank Acceptance Agreements", accepting 33 bank acceptance bills with the drawer being Longtai Company and the payee being Tianjin Huaxiang Technology Co., Ltd., with a total face value of 306.3 million yuan. On the same day, Hua Xia Bank signed the Pledge Contract with Qiulin Group, stipulating that Qiulin Group will use its 100 million yuan time deposit certificate to provide pledge guarantee for the creditor's rights under the Bank Acceptance Agreement. Houlongtai Company failed to repay in full and on time. Hua Xia Bank subsequently sued the court. In the first instance, the Tianjin High Court ordered Longtai Company to repay the loan and Qiulin Group to assume the responsibility of pledge and guarantee. Qiulin Group refused to accept it and appealed to the Supreme Court.


    The second instance of the Supreme Court pointed out that in accordance with the "Non-recourse Domestic Factoring Business Contract", Hua Xia Bank provided Longtai Company with factoring financing services on the premise of accepting Longtai Company's accounts receivable, and Hua Xia Bank should collect and review  the "Accounts Receivable Transfer Details", "Accounts Receivable Transfer Confirmation Letter" and other supporting documents provided by Longtai Company in advance.However, in this case, China Xia Bank provided Longtai Company with factoring financing services without receiving the above-mentioned materials, and Longtai Company did not deliver the above-mentioned materials to Hua Xia Bank after that.


    The Supreme Court held that because Hua Xia Bank gave up the risk prevention and control measures pre-set by both parties and let the risks occur. As a result, Longtai Company refused to deliver the "Account Receivable Transfer Confirmation Letter", which in turn resulted in Hua Xia Bank's unsuccessful transfer of the accounts receivable and related rights involved in the case, and the factoring contract in this case actually became a general loan contract. Hua Xia Bank changed the contract performance method without obtaining the written consent of the guarantor. This change not only violated the original intention of Qiulin Group to provide guarantee, but also greatly increased the risk of Qiulin Group's actual guarantee responsibility. Therefore, Qiulin Group does not need to assume the guarantee responsibility, and Hua Xia Bank will be responsible for the consequences caused by its provision of factoring financing services in advance.


    Enlightenment: The establishment of the factoring legal relationship is based on the premise that the bank obtains the certificate of rights of accounts receivable. If the bank issues the financing without obtaining the corresponding certificate of rights, it means that the legal relationship of factoring has not been established, and the contract between the two parties will be regarded as general. In the loan contract, the bank bears the major risk that the huge amount of financing cannot be recovered.

     

    Summary


    The so-called factoring contract refers to a comprehensive financial contract signed between the factoring party and the creditor of the accounts receivable, on the premise that the creditor transfers its accounts receivable, and integrating the collection, management, bad debt guarantee and financing of the accounts receivable. service contract.


    Factoring contracts have similarities with assignment of claims. However, compared with the general assignment of creditor's rights, the factoring party needs to undertake more obligations. Compared with general loan financing, factoring business has a relatively low entry threshold, so there are more risks. The most basic legal risk is the authenticity, validity and transferability of accounts receivable. Therefore, when factoring in the factoring business, the factoring should strictly examine the customer's credit status and the authenticity and legitimacy of the accounts receivable.


    The "Civil Code" expressly stipulates that the creditor and debtor of accounts receivable fictitious accounts receivable as the subject of transfer, and enter into a factoring contract with the factoring party. As a fraudulent party, the debtor of the accounts receivable shall not confront the factoring party on the grounds that the accounts receivable do not exist. However, unless the factoring party knows that it is fictitious. This provision means that if the factoring party has conducted necessary and prudent investigation and verification of the authenticity and legality of the accounts receivable before lending, it is sufficient to ensure that it is sufficient to form a reasonable trust in the authenticity of the underlying transaction. Even if the transaction is later proved to be fictitious, it still does not affect the determination that the factoring party has fulfilled its review obligations and the validity of the factoring contract, thus avoiding the corresponding risks.

    Even so, there is still a lack of uniform and definite standards for the duty of care of the factoring party in practice by local judicial organs, resulting in different judgment standards; however, we can still sort out the current authoritative judgment ideas from the above-mentioned Supreme Court cases. It is suggested that the factoring agent can hire a law firm specializing in financial business to check the business or provide an ex-post relief plan.


    Looking forward to the future, it is the general trend that our country's factoring industry will become more regulated and operate in compliance with regulations. With the continuous improvement of the legal and regulatory environment and the continuous improvement of the factor's ability to manage risks, it is believed that the relevant referee standards will tend to be unified in the future, and the risks of the factoring business will be further resolved.


    JAVY Law Firm’s Official Website Suggestion Box
    Dear Netizens,Nice to see you!:
    Welcome to the official website of JAVY Law Firm. In order to continuously improve the quality of the website and the service quality of all colleagues in JAVY Law Firm,your suggestions and comments on any aspect of our firm can be put forward here, and we will listen to you carefully. Looking forward to your valuable suggestions in your busy schedule. Your information or idea is only for research and will never be made public. Please feel free to answer.
    *Name:
    *Cellphone:
    1. Where did you get the information about JAVY Law Firm?
    2. Does the content of this website meet your needs? Are there any other suggestions?
    3. What do you think of the environment of JAVY Law Firm? Are there any other suggestions?
    4. Do you think JAVY Law Firm has convenient transportation? Are there any other suggestions?
    5. Does the current business scope of JAVY Law Firm meet your needs? Do you have any other better suggestions?
    6. How about the lawyer's services that contact you? Are there any areas for improvement?
    7. Do you think if there are any shortcomings of JAVY Law Firm? What are the specific suggestions and expectations?