Basic facts of the case

In 2006, the Plastic Company signed a Factoring Agreement and a Comprehensive Credit Agreement with the bank for its accounts receivable claims against the Technology Company and notified the Technology Company. The Technology Company remitted part of the accounts receivable to the Plastic Company’s escrow account at the bank. In 2008, the bank sued the Technology Company for repayment of overdue accounts receivable of more than 2 million US dollars and required the Plastic Company to assume additional repayment liability in accordance with the terms of the repurchase factoring. The Technology Company defended itself with the prohibition of transfer clause stipulated in the purchase and sales contract signed between it and the Plastic Company.

Ruling

The court ruled that the essence of recourse or repurchase factoring should be a loan contract with a pledge of debt. my country has not joined the International Factoring Convention. In the judicial practice of foreign-related civil and commercial cases, the International Factoring Principles are applicable in my country as international practices. According to the provisions of the Principles, the prohibition of debt transfer clauses agreed by the parties to the domestic trade basic contract does not affect the validity of the international factoring contract. However, for domestic trade disputes, my country’s laws, administrative regulations and rules do not have clear provisions on factoring contracts. According to Article 79 of the Contract Law, the creditor may transfer all or part of the rights of the contract to a third party, except for those that cannot be transferred according to the agreement of the parties. In this case, the purchase and sales agreement signed by the technology company and the plastic company clearly stipulates the clause prohibiting the transfer of contract rights and obligations, which meets the exceptions stipulated in Article 79 of the Contract Law. When the bank, as a factor, signed the Factoring Agreement and the Comprehensive Credit Agreement with the plastic company, it did not fulfill its duty of review and attention to the terms of the basic transaction contract involved in the factoring. Therefore, the plastic company transferred its accounts receivable from the technology company to the bank without the consent of the technology company, which violated the above legal provisions. Even if the creditor notified the debtor, it would not be effective against the technology company. Therefore, it should be determined in accordance with Article 79 of the Contract Law that the debtor has the right to defend against the factor for the accounts receivable that are prohibited from being transferred, except that the debtor expressly agrees to the transfer in the actual performance. Although the technology company paid part of the due payment to the bank’s escrow account according to the instructions of the plastic company, it cannot be determined that the technology company agreed to the plastic company’s transfer of all its accounts receivable claims against the technology company to the bank. This part of the payment behavior can be regarded as partial acceptance of the transfer of claims. Given that the technology company and the plastic company have settled the corresponding payment, the principal debt involved in this case is based on the trade financing business between the bank and the plastic company under the “Factoring Agreement” and the “Comprehensive Credit Agreement”, and the “Factoring Agreement” clearly stipulates that the bank reserves the right to claim the principal and interest of the trade financing from the plastic company. Therefore, the principal debt in this case, namely the factoring financing, should be repaid by the plastic company to the bank.

Expert Comments

For domestic trade disputes, according to the provisions on the transfer of claims in the contract chapter of the China Civil Code, it is determined that the debtor has the right to defend against the factoring company for the accounts receivable that are prohibited from being assigned, except when the debtor expressly agrees to the transfer in the actual performance. In this case, the technology company raised the defense that the purchase and sale contract stipulated a prohibition on transfer. The factoring contract did not provide for this, and the case should be handled in accordance with the above-mentioned provisions on the transfer of claims.

---

For legal disputes relating to China, contact a lawyer at: +86-13920701735