In the previous post, we
understood the basics relating to Factoring. In the present post, we shall
understand the types of factoring prevalent in the present markets. I shall
also talk about the important definitions related to factoring under the Indian Act. Lastly, I shall discuss briefly the United Nations Convention on the
Assignment of Receivables in International Trade.
Types of Factoring[1]
1. Domestic
Factoring – It is the usual form of factoring. The invoices are sold to the factor and the customer is informed. This includes Sales bill factoring and Purchase bill factoring.
2. Export
factoring – This type of factoring is seen as an alternative to letter of
credit, as the importers insist on trading in open account terms. Export
factoring eases the credit and collection troubles in case of international
sales and accelerates cash flows and provides liquidity in the business.[2]
3. Advance factoring
– In case of the Advance Factoring, the factor provides financial accommodation
and non-financial services. The factor keeps a margin while funding, which is
called the assignor’s equity and is payable on actual collection.[3]
4. Maturity
factoring – Here, the factor makes payment on a due date. This sort of
funding is resorted to by assignors who are in need of non-financial services
offered by the factors.[4]
5. Supplier
guarantee factoring – This is also known as drop shipment factoring.
This sort of factoring is common where the assignor acts as a mediator between
the supplier and the customer.[5]
Important Definitions under the
Factoring Regulation Act,
2011
1. Assignment
[Section 2 (a)] – ‘‘assignment’’ means transfer by agreement, of undivided
interest of any assignor in any receivable due from any debtor in favour of a
factor and includes an assignment where either the assignor or the debtor, are
situated or established outside India.
2. Assignee
[Section 2 (b)] - "assignee" means a factor in whose favour the
receivable is transferred.
3. Assignor
[Section 2 (c)] - "assignor" means any person who is the owner of
any receivable.
4. Netting
Agreement [Section 2 (l)] - "netting agreement" means any
agreement among the system participants for the purpose of determination by the
system provider of the amount of money or securities due or payable or
deliverable as a result of setting off or adjusting the payment obligations or
delivery obligations among the system participants, including the claims and
obligations arising out of the termination by the system provider, on the
insolvency or dissolution or winding up of any system participant or such
circumstances as the system provider, may specify in its rules or regulations
or bye-laws, of the transactions admitted for settlement at a future date so
that only a net claim be demanded or a net obligation be owned.
5. Financial
Contract [Section 2 (k)] - "financial contract" means any
spot, forward, future, option or swap transaction involving interest rates,
commodities, currencies, shares, bonds, debentures or any other financial
instrument, any repurchase of securities and lending transaction or any other
similar transaction or combination of such transactions entered into in the
financial markets.
6. Receivables
[Section 2 (p] - "receivables" mean all or part of or undivided
interest in any right of any person under a contract including an international
contract where either the assignor or the debtor or the assignee is situated or
established in a State outside India; to payment of a monetary sum whether such
right is existing, future, accruing, conditional or contingent arising from and
includes, any arrangement requiring payment of toll or any other sum, by
whatever name called, for the use of any infrastructure facility or services.
UNCITRAL Law on Assignment
The United Nations Convention on the Assignment of Receivables in International Trade
was adopted to facilitate availability of credit and capital. Article 2 (a)
of the Convention defines ‘Assignment’ as –
“Assignment”
means the transfer by agreement from one person (“assignor”) to another person
(“assignee”) of all or part of or an undivided interest in the assignor’s contractual
right to payment of a monetary sum (“receivable”) from a third person (“the
debtor”). The creation of rights in receivables as security for indebtedness or
other obligation is deemed to be a transfer.”
The definition
covers both the creation of security rights in receivables and the transfer of
full property in receivables, whether or not for security purposes. Further,
the Convention defines receivables as contractual right to payment of a
monetary sum and includes parts of and undivided interests in receivables. Also
included are loan receivables, intellectual property licence royalties, toll
road receipts and monetary damage claims for breach of contract, as well as
interest and non-monetary claims convertible to money. The UNCITRAL stipulations
also requires that notification of assignment of debt is to be given by either
the assignor or the assignee, the assignee may not retain more than the value
of its right in the receivable and notification of the assignment or a payment
instruction is effective when received by the debtor. However, until the debtor
receives notification of the assignment, the debtor is entitled to be
discharged by paying in accordance with the original contract.
Article 3 of the
Convention talks about international transactions. It says that a receivable is
international if, at the time of conclusion of the original contract, the
assignor and the debtor are located in different States. Similarly, an
assignment is international if, at the time of conclusion of the contract of
assignment, the assignor and the assignee are located in different States. We
see that while most countries recognize the usefulness of this convention, the
process of developing an international legal regime is never smooth.
In the next post, I shall talk about the registration of factors and receivables under the Indian Act.
[2]
Ibid.
[3]
Ibid.
[4]
Ibid.
[5]
Ibid.
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