Application of law to commercial factoring operations in China

The precondition for commercial factoring is the assignment by a creditor of its accounts receivable, and the nature is the assignment of the creditor’s rights. Given the absence of specific legislation on commercial factoring in China, how to apply the current rules is of practical significance in regulating the operation of the commercial factoring business.

Q: What is the legal basis for commercial factoring in China?

A: Article 79 of the Contract Law primarily serves as the legal basis. It says a creditor may assign all or part of the rights under a contract to a third person, except for the following circumstances: (1) the rights are not assignable according to the nature of the contract; (2) the rights are not assignable as agreed between the parties; and (3) the rights are not assignable in accordance with the law. In the commercial factoring business, as long as a supplier and a buyer (debtor) have not agreed in a contract that the rights under the contract are not transferable, the creditor’s rights arising from the contract are not rights that are not transferable according to the nature of the contract or legislation.

The first paragraph of article 80 of the Contract Law provides that a creditor must notify a debtor of the assignment of its rights. Otherwise such assignment is not legally effective to the debtor. Accordingly, if a supplier notifies a debtor, then the assignment has a legal effect between the assignee and the debtor, otherwise the assignment has no legal effect.