Legislative progress of Factoring in China

Thursday 9 January 2020

Article written by YONGJUN ZHAO, Fortune International Factoring Co. Ltd. China. The article is an extract from FCI In-Sight published in November 2019.

Generally, the countries and regions with modern statutory law would legislate and regulate the assignment of civil obligatory rights or the assignment of commercial obligatory rights, i.e. factoring. However, most of them only regulate the assignment of civil obligatory rights in one part of Civil Code and very few of them, such as Portugal and Macau of China, regulate the assignment of civil obligatory rights in one part of Civil Code and the assignment of commercial obligatory rights in one part of Commercial Code both. Although the United States takes judicial precedent as the main source of law, the assignment of commercial obligatory rights (factoring) is only subject to the uniform rules of Article IX ‘Secured Transactions’ in U.U.C.

The current Contract Law of China preliminarily established the general rules for the assignment of civil obligatory rights, thus basically building the legal environment for the assignment of accounts receivable. However, the legislation on assignment of commercial obligatory rights is still missing, which leads to the situation that corresponding judicial cases do not have lawful regulations to rely on. With the comprehensive deepening of political and economic reform, China made a major decision in October 2014, that is, compilation of the Civil Code. In August 2018, Standing Committee of the National People’s Congress (NPC) deliberated for the first time the draft Civil Code provisions and issued the first draft to the public in September 2018. With the active effort by the Supreme People’s Court, the bank and commercial factoring industries, the Constitution and Law Committee of NPC, after deliberation, agreed to establish a special chapter to stipulate factoring contract in the second revision of draft Contract Part of Civil Code. In December 2018, Standing Committee of NPC deliberated for the second time the draft Contract Part of Civil Code and the chapter on factoring contract as included in the scope of deliberation for the first time.

The distinctive feature of China’s factoring legislation is that there are special chapters to regulate both the assignment of the civil obligatory rights and commercial obligatory rights (factoring), in the Contract Part of Civil Code. On the one hand, principle provisions on the assignment of the civil obligatory rights are regulated in Chapter 6 ‘Modification and Assignment of Contract’ in the second revision of draft Contract Part of Civil Code, including Assignment of Obligatory Rights and the Exceptions, Notification of the Assignment of Obligatory Rights, Assignment of Accessory Rights, Obligor’s Right of Defense against the Assignee, Claiming Offset by the Obligor against the Assignee, and Expenses for Assignment of Obligatory Rights. These provisions basically maintain the general rules on the assignment of civil obligatory rights in the current Contract Law and legislative stability is hence maintained. On the other hand, principle provisions on the assignment of the commercial obligatory rights are also regulated in Chapter 16 ‘Factoring Contract’ in the second revision of draft Contract Part of Civil Code, including Definition of Factoring Contract, Fictitious Accounts Receivable, Notification of the Factor to the Debtor, Recourse Factoring, Non-Recourse Factoring, and Multiple Assignment of Accounts Receivable. These provisions respond to the legal needs of the factoring industry and reflects the openness and foresight of the legislation in China.

In contrast with bank factoring’s continuing decline of business, commercial factoring has experienced a tremendous development since 2012. By now, commercial factoring enterprises have facilitated the receivables financing of 3 million of small- and mediumsized enterprises with the total of 4 trillion Yuan. Factoring has become a significant means for small-and medium-sized enterprises to solve the problems of financing difficulty, and for big enterprises to deleverage and cut costs.

According to the legislation planning, China aims to finish the uniform compilation of Civil Code by 2020. With the legislation of the assignment of the commercial obligatory rights (factoring) being included to the Civil Code, China will become the first country in the world to specify Factoring Contract as an independent and typical contract in the Civil Code. This is a landmark event in the international factoring industry, which will contribute to the future development of China’s factoring industry and provide important reference to the legislation of the assignment of commercial obligatory rights (factoring) in other countries and regions.