JC Master Information | If litigation representation is covertly carried out under the guise of debt assignment, how should the validity of such conduct be determined?

　　When an entity lacking the requisite qualifications for litigation representation engages in litigation‑agency activities by acquiring creditor’s rights and then bringing suit, how should the validity of such conduct be determined? Recently, the People’s Court of Xingning City, Guangdong Province, concluded a dispute over a sales contract, ruling that such unlawful litigation‑agency practices—concealed under the guise of debt assignment—are invalid, and that the assignee may not thereby acquire the underlying creditor’s rights.

　　Liu owed Li a sum of RMB 156,000 for goods. In November 2023, Li entered into a Debt Assignment Agreement with an investment enterprise and an asset management company, under which Li assigned his claim against Liu in divided portions: 1% of the claim (amounting to RMB 1,560) was assigned to the investment enterprise, 29% was assigned to the asset management company, and Li retained 70% of the claim. The agreement further stipulated that all costs associated with enforcing Li’s retained claim would be borne by the asset management company, while the right to a refund of court fees in the litigation would belong to the investment enterprise. Following the execution of the agreement, Liu failed to make any payments to the assignees, and Li continued to pursue collection of the full amount from Liu on his own. Consequently, the investment enterprise brought suit based on the 1% portion of the claim it had acquired, seeking payment of RMB 1,560 from Liu. An investigation revealed that the ultimate controlling persons of the investment enterprise and the asset management company were relatives, and that the two entities had long engaged in profiting by acquiring small‑value claims and then filing lawsuits. Through the disputed agreement, they split the same claim: the investment enterprise initiated litigation over its 1% share, and, should it prevail, the asset management company planned to file a separate action concerning its 29% share. Notably, the investment enterprise’s business scope includes investment management and legal consulting but does not encompass law office services, meaning it lacks the requisite qualifications to act as a litigation agent.

　　After reviewing the case, the court held that the key issue was determining the nature and validity of the “Debt Assignment Agreement.” Although the agreement was titled a debt assignment, several irregularities were evident, sufficient to demonstrate that the parties did not genuinely intend to effect a transfer of the underlying claim. First, after assigning the debt, Li continued to independently pursue collection of the entire obligation, indicating that he had not truly relinquished the core rights associated with the claim. Second, an asset management company acquired only 29% of the debt yet was required to bear all litigation‑related expenses for the remaining 70% retained by Li, creating a gross imbalance between rights and obligations that defies normal commercial logic. Third, the right to a refund of court fees ordinarily arises automatically upon the plaintiff’s status and does not require any special stipulation; however, the agreement expressly allocated this right to the investing entity, reflecting a cost‑shifting arrangement designed by the investment office to recover its litigation‑agency expenses. In sum, the agreement amounted in substance to a financing arrangement whereby creditor Li sought to pass on litigation costs by transferring certain substantive rights—and even procedural rights—in exchange for consideration. As a legal‑consulting service provider, the investment office unlawfully offered litigation‑agency services under such a guise and profited therefrom, thereby disrupting the proper administration of justice and contravening the core socialist values of good faith. Accordingly, the Debt Assignment Agreement is invalid, and the investment office never actually acquired the debt. The court therefore dismissed its claims. The judgment has now become final and binding.

　　Judicial Commentary

　　The litigation‑agency system is pivotal to the orderly functioning of the legal services market and to the protection of the rights and interests of the parties involved. In this case, a certain investment enterprise, acting as a legal‑consulting service provider, colluded with an affiliated party to disguise its litigation‑agency activities as debt collection by dividing claims and pursuing them in successive lawsuits. In reality, this scheme used the formal transfer of claims to conceal unlawful litigation‑agency conduct; its defining feature was the absence of a genuine agreement on the assignment of claims between the parties. The minuscule 1% share transferred, coupled with the creditor’s continued self‑initiated efforts to collect the entire debt, falls far short of constituting a valid assignment of claims and instead conoffices that the two parties conspired to treat litigation rights as the object of their transaction. Pursuant to Article 146 of the Civil Code, which governs the validity of false expressions of intent and concealed acts, the alleged assignment of claims is void because it stems from a fictitious manifestation of will. Moreover, the litigation‑agency sector is subject to strict state regulation, with clear statutory requirements governing the qualifications of practitioners. The business scope of the investment enterprise does not encompass litigation‑agency services; accordingly, its covert entrustment of litigation representation to Li Mou violates mandatory legal provisions and is likewise invalid.

　　The judgment in this case explicitly rejects the validity of engaging in litigation‑agency activities by means of debt‑assignment, thereby underscoring the people’s courts’ commitment to upholding procedural order and fostering the healthy development of the legal services sector. The judge cautioned that, as market entities, legal‑consulting service providers must ensure that their methods and means of generating profit comply with the law and may not exceed their authorized scope of business to engage in litigation‑agency services. Moreover, members of the public seeking legal assistance should carefully verify the scope of practice of law offices and legal‑consulting service providers, choosing only professional and lawful entities to safeguard their legitimate rights and interests.

　　(Reposted from: Shandong Higher People’s Court)