CHINA Law and Practice Contributed by: Borong Liu, Xiaoli Liu, Jingyi Lu and Zhijie Zhang, Zhong Lun Law Firm
predicted value, or to repurchase the underlying assets under certain circumstances (such as the deterioration of the transferor’s business condi - tion or a material breach of contract). No judicial case has yet indicated that these arrangements will affect the recognition of a true sale. How - ever, with the increase in legal disputes related to securitisation, it remains to be seen how judicial practice will evolve in respect of the standards for true sale. “Internal Effect” and “External Effect” Under PRC laws, the transfer of a creditor’s claim can have both an “internal effect” and an “external effect”. The internal effect of the trans - fer refers to its effect in relation to the transferor and the transferee. In this regard, as long as the asset transfer agreement has come into effect and the preconditions of transfer provided in the transfer agreement have been met, the transfer of the assets will be effective against the trans - feror. Generally, the external effect of the transfer of a creditor’s claim first refers to the effect of the transfer in relation to the debtor. According to Article 546 of the Civil Code, any transfer of a creditor’s claim is invalid against the debt - or unless the debtor has been informed. This means if a debtor has not received notice of the transfer of the creditor’s claim, the transferee cannot, on its own, assert the right against the debtor. The external effect of the transfer of a creditor’s claim also includes the effect on the creditors of the transferor and any third parties. Although it is not a requirement, the transfer of accounts receivable can be registered in the Registration and Public Notice System of PBOC’s Credit Ref - erence Centre. According to Article 768 of the Civil Code and Article 66 of the Interpretation of
the Security System, when one account receiva - ble is the underlying asset of a factoring, pledge, and transfer simultaneously, the People’s Court will determine the order of priority based on fac - tors such as whether the registration of transfer has been completed, the time order of the reg - istration, and the arrival time of the notice of the transfer to the debtor. In addition, regarding the mortgage and pledge securing the creditor’s claim, although these security rights are transferred to the transferee along with the creditor’s claim, the transferee’s right may not be able to confront a bona fide third party if no change of mortgage/pledge reg - istration has been made to put the transferee’s As mentioned above, certain perfection meas - ures are required to make a transfer of financial assets definitively enforceable against the debt - ors, the transferor’s creditors and bona fide third parties. These include registering the transfer of accounts receivable, notifying the debtors of the transfer, a change of mortgage/pledge reg - istration, and the transfer of possession of the pledged movables. For a more detailed analysis on right perfection measures, see 3.3 Principal Perfection Provisions . Opinion of Counsel In a securitisation transaction, a legal counsel is normally not required to issue an opinion on whether a transfer of the underlying assets con - stitutes a true sale. However, when legal counsel does issue an opinion on whether the underlying assets could achieve bankruptcy remoteness, it would consider the nature of such transaction and its effect on bankruptcy remoteness. right on public notice. General Requirements
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