Factoring Legislation and

Regulation

Douala, Cameroon 22nd November 2013

Definition

• Legislation o A law or set of laws made by a governing body

• Regulation o Rules or directives made and maintained by an

authority to control or govern conduct and behaviour

Factoring Legislation

• Different legal systems around the world • Essentials of factoring expressed in different ways

and may or may not be part of law: • Transfer of Receivables (‘Assignment’) • Notice of assignment a requirement ? • Debtor’s duty to pay the factor • Rights over existing and future debts • Receivables transferred to the factor when they come

into existence • Rights of set-off by the debtor

Factoring Legislation

• UNIDROIT • Convention on International Factoring,

Ottawa 1988 • Targeted the adoption of rules to provide a legal

framework to facilitate international factoring • 23 articles over 6 pages • Concerns international factoring, but useful guide

for developing domestic factoring law

Factoring Legislation

• UNIDROIT • Copies in English and French on your USB sticks • It lists the 4 functions performed by a factor (a1) • It states that “notice of assignment of the

receivables [must] be given to the debtors” • Describes the rights and duties of the parties (a5-

10) • Scope limited to notified factoring only

Factoring Legislation

• UNIDROIT • Position paper “Assignment of Contractual Rights

and Duties” (Rome, February 1999) highlights terminology issues

• A “transfer of rights” may be achieved by different mechanisms in different legal systems (e.g. in France “cession de créance” or “subrogation”)

• Differences of interpretation in Civil Law and Common Law

Factoring Legislation

• UNIDROIT • (a6) assignment to a factor is effective even if

there is a prohibition of assignment agreement between supplier and debtor

• The above article was the subject of much disagreement between different Countries

Factoring Legislation

• UNIDROIT • As at 31/12/90 (closing date) 15 (of 59) countries

signed the Convention, including Ghana, Morocco, Nigeria and Tanzania

• Of those 15, seven countries have ratified the Convention, including Nigeria, therefore Convention came into effect (1995)

Factoring Legislation

• UNCITRAL • United Nations Commission on International Trade

Law • Convention on the Assignment of Receivables in

International Trade New York, 2001

• “Receivables” refers to a variety of transactions including factoring, forfaiting, securitisation, etc

• To date the Convention is not ratified

Comparison UNIDROIT & UNCITRAL

• Reference University of Manchester study • Scope of UNCITRAL very wide • Overlap is only on notified factoring of

receivables arising from sale and service contracts

• UNCITRAL also discusses the international assignment of domestic receivables (securitisation)

Comparison UNIDROIT & UNCITRAL

UNIDROIT UNCITRAL

Definitions Only defines ‘factoring contract’

Many, including ‘assignor’, ‘assignee’, ‘receivables’

Variation of provisions

Not allowed Allowed by agreement of the parties

Debtor’s duty to pay assignee (factor)

If notice of assignment given by assignor (supplier)

Allows notice given by assignee (factor) – useful if assignor goes bankrupt

Point of time when notification effective

Not addressed Addressed - receipt by the debtor

Debtor’s right of set-off

Allows debtor defences from original sales contract

Allows defences from other ‘closely related’ contracts

IFG Model Factoring Law

• Prepared by the Legal Committee of the IFG • Currently in its second draft stage; May 2013 • Ideas and most of the wording is taken from

UNCITRAL but scope is narrowed to factoring (but all forms, including reverse factoring and non-notified products)

• Applies to domestic or international assignments

IFG Model Factoring Law

• Assignment includes future receivables without a new act of transfer

• Ban of assignment clauses imposed by the debtor do not prevent a factoring transaction BUT

• Debtor may claim damages from the supplier (not the factor) for breach of contract

IFG Model Factoring Law

• Assignor represents that they • have the right to assign the receivable • they have not previously assigned the receivable

to another assignee

• If debtor payment is to assignor, the assignee (factor) is entitled to payment of the proceeds

IFG Model Factoring Law

• A registration system (for the assignment) on an internet platform might be useful for emerging markets o The factor can easily ascertain priority of

assignment without detailed due diligence

• The Model Law invites national legislators to adapt its scope and content to their specific legal environment

GRIF: the General Rules of International Factoring

• A set of rules for international factoring • The aim is to ensure daily operations are

managed consistently and correctly • Self-regulation • The GRIF can usefully inform

• development of a national (domestic) law • Regulation of factoring and factors • a factoring agreement for use between factor and

assignor

GRIF: the General Rules of International Factoring

• 8 sections including • Assignments • Credit Risks • Collection of Receivables • Representations • Transfer of Funds • Disputes

Regulation

• Rules or directives made and maintained by an authority to control or govern conduct and behaviour

• Regulation of factoring varies from country to

country For example: • France is highly regulated • UK is unregulated

Regulation

• Central Bank regulation • e.g. France

• Financial Services authorities • e.g. Egypt

• National factoring associations • e.g. ABFA (Asset Based Finance Association), UK

Central Bank

• In France factoring companies are, like banks, credit institutions governed by the Banking Act of 24 January 1984

• They must be authorised • They are subject to supervision by the National

banking regulator • Bound by banking regulations • Must comply with cover and risk-division ratios

Egypt Financial Services Authority

– www.efsa.gov.eg A factoring company shall meet the following conditions: • It shall be a joint-stock company • It shall practice factoring only • A financial institution shall be a shareholder • Paid capital shall be 10 million EGP • The Managing Director shall have 10 years

financial or banking or insurance experience

Egypt Financial Supervisory Authority

• www.efsa.gov.eg To practice factoring the company shall: • Notify EFSA of its standards, rules and regulations • Keep registries of its details of operations • Be a member of an international factoring

association (e.g. IFG) if financing cross-border factoring

ABFA, UK

• www.abfa.org.uk Self regulatory framework: • ABFA code of conduct: 6 key commitments. Members shall

1. abide by the code 2. act with integrity and responsibility 3. provide appropriate information in a timely and

transparent manner 4. ensure legal documents are clear and unambiguous 5. Provide effective and timely client services 6. Operate their own complaints procedure

ABFA, UK

• www.abfa.org.uk Self regulatory framework:

• An independent complaints process • A professional standards council

Regulation

Positives Negatives

Sets minimum standards Cost

Controls behaviour Ties up resources

Transparency Anti-competition

Customer confidence Fewer providers

Mitigation of risks Bureaucracy

Industry reputation Too prescriptive

* Notes from Kazakhstan – Market immaturity and lack of sophistication – Legislation allows both Bank or independent. Being bank-

owned may be advantageous re taxation (Banks exempt from VAT)

– Independents pay more for refinancing – Like Russia, Kazakhstan is regulated by Civil Code but it

does not differentiate between n/r and recourse – Banking regulations state factors must undertake the risk

of debtor not paying (i.e. non/recourse) – Yet recourse is the major product

(a) “work around” is Debtor guarantees to pay (b) no credit insurance available (c) early stage of development of market

* Notes from Serbia • Market started 2005 • 9 years of growth in “unfavourable regulatory environment” • July 2013: law on factoring adopted • Until then there was law on obligations as a framework for

assignment of receivables but did not specify how obligations were notified

• Existence of a specific law will educate the market –clear legal environment allows existing factors to invest in educating the market

• Law now overrules prohibition on assignment clauses in favour of factor

• Requirement of registration of factoring companies will cut out “quasi-factoring” (confusing) products

* Francophone Factoring Agreement

• djlfsjd Créancier (subrogeant)

Supplier

Debtor (subrogé)

Subrogation

Tiers(3rd party) (subrogataire)

FACTOR

Créancier (cédant) Supplier

Tiers(3rd party) (cessionnaire)

FACTOR

Debtor (cédé)

Loi Dailly

• SUBROGATION is the substitution of one party in the

place of another concerning rights and remedies against a another party. The factor substitutes for the supplier

• Refer French Civil Code article 1250 • A « subrogation » form could be completed at each

assignment or a permanent (one original) form is kept • Supplier has to put assignment text on all invoices

informing debtors • Supplier assigns receivables to the factor without any

formal process (he only needs to send them by electronic process )

* Subrogation

• Supplier has to put an assignment label on all receivables assigned to his factor with specific wording

• The details of all assigned receivables has to shown on the assignment form sent to the factor.

• The factor has to indicate the receipt date on the assignment form.

• Normally the assignment form should be an original one and not a document received by e-mail and/or fax

• The factor also has the obligation to send by registered mail a formal notification of the assignment to debtors.

* Loi Dailly

French Assignment Label Payments to be made out to ABN AMRO Commercial Finance and sent to : ABN AMRO Commercial Finance – 39, rue Anatole France 92532 Levallois-Perret cedex Bank : Banque Neuflize OBC (ABN AMRO Group)- 3, avenue Hoche- 75008 Paris Bank Code : 14978 Desk Code : 00100 Account n° : XXXX RIB Key : XXX IBAN : XXXXXX Receivables assigned to ABN AMRO Commercial Finance pursuant to articles L 313-23 to L 313-35 of the French Monetary and Financial Code Subrogation

Loi Dailly

TRANSFER OF RECEIVABLES 1. Legal Assignment re. s136 of Property Act

2. Equitable Assignment (does not fully comply

with 1) a) Whole turnover : « The client sells and the factor

purchases all existing and future debts » b) Facultative arrangement: individual receivables

offered for sale to the factor

Equitable assignments avoid stamp duty

* Anglophone Factoring Agreement

Legal Assignment • Must be in writing • Notice must be

given to the debtor • Assiognment must

be absolute – for the whole receivable

• Factor can sue in his own name for recovery

* Anglophone Factoring Agreement Equitable Assignment • Does not have to

be in writing • Notice does not

have to be given to the debtor

• Assignment can be for part of the receivable

• Factor should join the client to sue for recoivery

TYPICAL CLAUSES Client warrants: 1. any receivable is due and owing

(delivery has been executed, invoice value correct & the receivable is free from set-off

2. To disclose any material facts concerning the receivable which may affect bad debt protection

3. He will not grant any rights over the receivable to any other third party etc.

* Anglophone Factoring Agreement

• Factoring is often started in an environment where there is no factoring law

• Existing legislation may be applied or interpreted but it may lack the fundamentals of factoring: ‘receivables’, ‘assignment’, the factor’s rights, etc

• Development of a factoring law defines the product, raises the profile and clarifies rights and obligations of the parties

• Existing models can inform local legislation development

• Regulation again raises the profile of factoring and seeks to define good practice

* Conclusions

Any questions ?