The Nature And Effectiveness Level Of Recourse Factoring Contract

In China,factoring is an important way for small and medium-sized enterprises to finance,but current law cannot meet the needs of the rapid development of factoring financing market.There are great differences between judicial practice and theoretical circles on the nature of the factoring contract for recourse.For the first time,the Civil Code(Draft)of China has added a chapter on "factoring contract",but the nature and effectiveness of the recourse factoring contract are not clear,and need to be explained.According to Clause 766 of the Civil Code(Draft),a factoring contract with recourse is legally a secured loan.The guarantee component of it is based on the assignment of receivables.Because the legal validity of the creditor’s right transfer is internal and external,the effectiveness level of a recourse factoring contract can also be analyzed from both internal and external aspects.The internal legal relationship of a recourse factoring contract refers to the relationship between creditors,factorers and debtors.The internal effect of the guarantee component in a recourse factoring contract is equivalent to the legal effect of joint and several liability guarantees.The internal effect of a recourse factoring contract mainly includes the scope of the secured creditor’s rights,scope of subject matter of guarantee,the collection management authority of the receivables,and the realization of the recourse.The external legal relationship of a factoring contract with recourse refers to the relationship between the parties to the factoring contract(mainly the factorers)and a third party outside the contract.In principle,contracts are only relative.This paper holds that the effectiveness of factoring contracts can be expanded through publicity,so that factoring contracts can be effective against third parties.Unfortunately,the Civil Code(Draft)lacks a registration system for factoring contracts,and the guarantee function preset in factoring contracts with recourse will eventually fail.This paper holds that the future Civil Code should add a clause: "The parties may agree to register for factoring business,and those who are not registered shall not confront third parties." The external effect of the guarantee component in a factoring contract with recourse is similar to the receivable pledge.The external effect of a factoring contract with recourse mainly involves priority right of the factorer to receive the receivables and the parties’ re-disposition of the subject matter of the contract.The two-dimensional nature of receivables and the particularity of the creditor’s rights transfer structure determine that the effectiveness of factoring contracts with recourse is divided into two different levels,internal and external.The internal effect can realize the function of credit guarantee,and the external effect can realize the function of real right guarantee.Specifically,the effectiveness level of a factoring contract with recourse can be divided into three levels.First,if the parties have neither notified the debtor of the accounts receivable nor handled the registration,it only generates the effect of borrowing between the creditor and the factor.Although the parties expressed their intention to establish a guarantee for the factorer,they could not achieve any practical guarantee function in terms of legal effects.Second,although the parties did not register,but if the debtor of the receivable issued a valid notice,the three parties formed a structure similar to joint and several liability guarantees,which could realize the function of guarantees.Third,if the parties not only issue a valid notice to the debtor,but also register,the validity of the contract is extended to a third party outside the contract.The guarantee function can be realized inside the factoring contract with recourse,and the external function of it can be similar to the pledge of accounts receivable.In summary,the factoring contract with recourse realized the functional overlay of the guarantee and the real right guarantee.