An internet-based receivables trading platform focuses on the issuance, transfer and financing of or with receivables vouchers. If an account receivable is transferred or pledged offline at the stage of voucher issuance and/or transfer, operations of the platform can be seriously affected, and this may give rise to legal disputes. This article focuses on legal disputes that may arise out of offline transfer or pledging of receivables at the stage of voucher issuance.
As shown in the flowchart on the right page, once supplier 1 and the core enterprise have an authentic underlying contract for the supply of goods or services concluded offline, supplier 1 has an account receivable from the core enterprise under the contract. The parties then cause an agreement to be signed online, pursuant to which the voucher relating to the account receivable will be issued, which the core enterprise is liable to pay when it is due and payable.
The account receivable under the underlying contract has been transferred offline before the voucher is issued. According to the Contract Law, no transfer of a creditor’s right is effective against the debtor unless the debtor is duly notified about the transfer. If supplier 1’s offline transfer of the account receivable under the underlying contract has been duly notified to the core enterprise, the core enterprise will no longer have the obligation to pay the receivables to supplier 1 and shall not issue the voucher to supplier 1.
The account receivable under the underlying contract has been pledged offline before the voucher is issued. According to the Property Law, the pledge of an account receivable takes effect when it is registered with the credit authority. But there are no explicit legal provisions about whether effectiveness of the pledge against the debtor is conditional upon notification of the pledge to the debtor. However, we can see that judges are generally supportive of this being considered a condition precedent, as revealed in the 2014 No. 296 civil judgment of the Intermediate People’s Court of Fuzhou City, Fujian Province, the 2012 No. 1019 civil award of the Supreme People’s Court, and the Guidance on Hearing Cases Involving Security Interest compiled by the second civil court of the Supreme People’s Court as the chief editor.
There are variations in judicial decisions because no legal provisions can be found that allow a pledgee to enforce payment against the debtor over whose debt the pledge is created. The Supreme People’s Court showed a supportive attitude by releasing the 11th batch of case studies (see the 2012 No. 661 civil judgment of the Intermediate People’s Court of Fuzhou City, Fujian Province), but changed its mind in its 2017 No. 1572 civil award, where it held that the pledgee shall only be entitled to a priority claim in the account receivable being pledged but have no right to enforce payment against the debtor.
It is thus clear that offline pledge of the account receivable under the underlying contract will affect certainty of the core enterprise’s payment obligation to supplier 1.
To avoid the risk of having to pay against the voucher online and pay the pledgee offline, the core enterprise should check before issuing any voucher whether there is any registered pledge over the account receivable under the underlying contract. If there is such a pledge or if any pledge notification is received, it should not issue the voucher.
The account receivable under the underlying contract is transferred or pledged offline after the voucher is issued. Where supplier 1 transfers the voucher to supplier 2 or a commercial factoring company and duly serves a notice to the core enterprise, supplier 1’s offline transfer or pledge of the account receivable under the underlying contract shall not be effective against the core enterprise or affect validity of the online transfer of voucher and/or factoring.
If prior to transfer of the voucher supplier 1 has transferred or pledged the account receivable under the underlying contract offline and duly served a notice to the core enterprise, the core enterprise should request the platform operator to lock up the voucher and prevent supplier 1 from transferring the voucher. If the core enterprise fails to do so, it may face the risk of assuming double payment obligations as described earlier.
To sum up, the platform operator should design various agreements and business processes to prevent legal disputes that may arise out of offline transfer or pledge of accounts receivable, so that it will be well positioned to protect lawful interests of its own and its users and capture more market share amid increasingly fierce competition.
Zhi Hui is an equity partner at Zhong Lun Law Firm
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