Protecting Factors' Interests in Bankruptcy Proceedings
DOI:
https://doi.org/10.54097/865qsp33Keywords:
Factoring; assignment by way of security; bankruptcy proceedings; protection of interests.Abstract
The Civil Code of the People's Republic of China recognizes the factoring contract as a nominate contract for the first time, but it does not resolve the longstanding dispute over the contract's legal nature. This article examines the competing theories of assignment of claims and assignment by way of security through bankruptcy-law questions such as the filing of claims and the scope of the bankruptcy estate. It argues that the security-assignment theory better reflects the structure and commercial purpose of recourse factoring. On that basis, the article analyzes imbalances in the protection of factors during bankruptcy proceedings, including the stay of security rights in reorganization, conflicts between bankruptcy set-off and security assignments, and the risks associated with future receivables. It proposes a necessity test and a compensation mechanism for staying security rights in reorganization, clearer priority rules for conflicts between bankruptcy set-off and the rights of a recourse factor, and a registration-based framework for the third-party effectiveness of assignments of future receivables. These reforms would improve the protection of factors while preserving the collective purposes of bankruptcy law.
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