Establishment and acquisition of commercial factoring enterprises

Factoring is a comprehensive credit service based on the accounts receivable of an enterprise that arise in connection with the goods sale or service contracts that it enters into in the course of transactions, where a commercial bank or commercial factoring enterprise provides trade financing, accounts receivable management, accounts collection, security for bad debts, etc.

Clarification of policies

On 27 June 2012, the Ministry of Commerce (MOFCOM) issued the Notice on Work Relevant to the Commercial Factoring Pilot Project. In October of the same year, MOFCOM issued the Reply of the Ministry of Commerce on the Implementing Plan for the Commercial Factoring Pilot Project, consenting to the launching of a commercial factoring pilot project and the establishment of commercial factoring companies in the Tianjin Binhai New Area and Shanghai Pudong New Area.

In December of the same year, MOFCOM further issued the Notice of the Ministry of Commerce on the Establishment by Hong Kong and Macau Service Providers of Commercial Factoring Enterprises in Shenzhen and Guangzhou on a Pilot Basis, opening Guangzhou and Shenzhen as pilot regions for foreign-invested commercial factoring, and permitting Hong Kong and Macau service providers to establish commercial factoring enterprises in the form of Sino-foreign equity joint ventures, Sino-foreign co-operative joint ventures, or wholly foreign-owned enterprises.

Subsequently, the above-mentioned jurisdictions each issued trial measures for the administration of commercial factoring enterprises, setting out further requirements in respect of the qualifications of the shareholders, registered capital, employees and risk capital of commercial factoring companies, and expressly providing that the competent commerce authorities of the pilot jurisdictions are the authorities in charge of the commercial factoring industry.

Shareholder qualifications

The access conditions for commercial factoring enterprises set by the competent commerce authorities of the different jurisdictions vary somewhat. Taking Shenzhen as an example, pursuant to the Interim Rules of Shenzhen Municipality for the Approval Work Associated with the Foreign-Invested Commercial Factoring Pilot Project, an application for the establishment or modification of a commercial factoring enterprise is to be accepted and reviewed by the Municipal Economy, Trade and Information Commission. Once an Approval Certificate of a Foreign-Invested Enterprise has been issued to the commercial factoring enterprise, the same is to be reported to the Guangdong Provincial Department of Foreign Trade and Economic Co-operation for the record.

The relevant basic requirements are as follows: (1) the Hong Kong or Macau shareholder of a commercial factoring enterprise is required to have a good reputation, and a track record and experience in engaging in the factoring business; (2) Hong Kong and Macau shareholders are required to satisfy the definition of, and requirements in respect of, a “service provider” of the Mainland and Hong Kong Closer Economic Partnership Arrangement and the Mainland and Macau Closer Economic Partnership Arrangement, respectively, and their respective supplementary agreements; (3) among the senior officers of the commercial factoring enterprise, at least two are required to have management experience in the financial sector and not have a poor integrity record; and (4) the registered capital of the enterprise may not be less than RMB50 million (US$8.1 million).

Additional obligation

Hong Kong investors in the form of a legal person are under an additional obligation to carry on a substantive business in Hong Kong in order to fully satisfy the requirements mentioned above. The particular test standard is as follows: (1) the services that the Hong Kong investor provides in Hong Kong should likewise include the nature and scope of commercial factoring; (2) unless otherwise provided, the Hong Kong investor should be incorporated in Hong Kong and should have been engaged in substantive business operations for at least three years (if it proposes to acquire at least 50% of the equity of a Hong Kong investor through an acquisition or merger, it is required to have held the shares for at least one year – only in this way can the Hong Kong investor that is the target of the acquisition or merger satisfy the conditions); (3) the Hong Kong investor has paid profits tax in accordance with the law while it has been engaged in substantive business operations; (4) the Hong Kong investor is required to own or be leased a premises in Hong Kong to carry on its substantive business operations, with the same required to be consistent with its scope and scale of business; and (5) at least 50% of the employees employed by the Hong Kong investor in Hong Kong should be unrestricted Hong Kong residents and/or mainland persons who have settled in Hong Kong on the strength of a one-way permit.

Prior to 2012, the entire commercial factoring industry found itself in a state of natural development. Although the government has issued a series of regulations in recent years, the acquisition of commercial factoring companies remains relatively immature. The legislative lag and variant standards with regard to the establishment and acquisition of commercial factoring companies brings some uncertainty.

The authors believe companies with the words “commercial factoring” in their names do not necessarily satisfy regulatory requirements. For example, in recent years many licensed wholly Chinese-owned commercial factoring companies in Shenzhen have rarely commenced actual operations, and their capital strength is uneven.

The reason can be found in Shenzhen’s implementation of reform of company business registration relatively early, implementing the subscription system for registered capital. Based on Shenzhen’s business registration regulations and the author’s understanding of the practical operations of certain companies, once a company whose name contains the words “commercial factoring” has passed preliminary approval, it can secure a business licence without undergoing prior examination and approval, provided that its scope of business does not include bank financing, finance security or other such matters that require separate approval.

However, the possibility that from now on such “commercial factoring companies” will be required to adopt follow-up regulatory measures that have undergone compliance review cannot be discounted.

Therefore, when acquiring a commercial factoring company, it is necessary to carefully consider whether it complies with the specific local requirements, and carry out comprehensive due diligence of, and assess, the qualifications of its shareholders, its registered capital, the approval of its qualifications, details of its substantive operations, the operating capabilities of its business team, etc., and prudently select the company targeted for acquisition.