Rules on the Certainty of Future Accounts Receivable

Abstract

Before the enactment of the Civil Code of the People’s Republic of China, the legislative recognition of future receivable factoring in China underwent a transformation from non-recognition to limited recognition only for receivable with underlying transaction relationship. Although the Civil Code acknowledges that future receivable is eligible for factoring, it does not explicitly restrict its transferability. Many foreign countries and international conventions recognize the eligibility of future receivables as factoring assets but require determinacy and certainty. The need for determinacy arises because future receivables are considered future claims therefore must meet the requirement of specific identification. In addition, to ensure the possibility of reasonable expectations for factoring parties, future receivables should be clearly identifiable. Given the fact that future receivables have yet to materialize, the concept of relative determinacy is employed to describe the degree of certainty, and the verification of the contractually agreed amount and the period when future receivables arise is adopted as the method for determination. In order to mitigate the risk of fictitious receivables arising from the lack of determinacy, the understanding of Article 763 of the Civil Code should be interpreted as "know or should have known". Factoring parties bear a reasonable duty to conduct appropriate due diligence for certainty examination and the minimum standard approach is recommended.