Article

Factual Summary: The Debtor and the Creditor concluded a credit agreement with a credit line of US$12,000,000 which included loan for US$4,800,000 and factoring for US$7,200,000. The credit type herein was not allowed to be changed into other types. Meanwhile, the credit-side and Guarantor made and entered a maximum amount guarantee contract under which Guarantor undertook a joint and several guarantee obligation for the debt under the credit agreement.

Subsequently, Creditor and Debtor entered an export commercial invoice discount contract which stipulated Creditor's right to unilaterally terminate the contract in the event of Debtor's management deterioration. Subsequently, Debtor and Creditor entered into a recourse factoring contract, under which the Debtor transferred the claim for receivables under three invoices to Creditor for financing. Accordingly, Creditor offered Debtor financing for US$2,400,000.

Later, due to Debtor's inability to pay, Creditor sued Debtor and Guarantor respectively for debt and guarantee responsibility.

The trial court found for Creditor, while dismissing its claim under the guarantee.

Legal Analysis:

1. Choice of law: To regulate international factoring business, FCI formulated the Code of International Factoring. The code is binding to parties involved in international factoring business.

2. The Creditor's Rights; Contract Law of China Article 206; Contract Law of China Article 207; Debtor's responsibility: The trial court held that the credit agreement, and the invoice discount contract were valid. Therefore, according to Contract Law of China Article 206 and Contract Law of China Article 207, the court concluded that the debit-side should assume liability for breach of contract, as it failed to make payment.

3. The Difference Between International Factoring and Bill Discount, Liability of Guarantor: In accordance with Code of International Factoring Customs, the financing was different from international factoring in at least four ways.

First, the financing in question was not an assignment of the receivables, but a transfer of the return funds.

Second, in accordance with general banking practice, the importer and the exporter should not be subordinate to each other or belong to one group. In this case, the financing in question was the transfer of the return funds of the debtor's parent company, which controlled the debtor's management and fund return.

Third, there was no import factor and the export factor had no recourse to the importer.

Finally, factoring and export commercial invoice discount were two different financing instruments operated by the creditor. The creditor offered financing to the debtor according to the invoice discount agreement, but not the export factoring agreement. Therefore, the trial court concluded the financing in question was not factoring, but bill discount which was beyond the credit agreement. As a result, the guarantor assumed no responsibility for it.

* JIN Saibo is a partner of Tongshang Law Firm.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.