Insights on Prohibitions and Assignments in Business Law
Explore the complexities of assignments of trade receivables, the significance of BoAs in loan agreements, and the impact of established wisdom on receivables financing. Delve into legal nuances from various jurisdictions, including the US, Canada, and New Zealand, regarding the effectiveness of BoAs. The ABFA survey sheds light on the practices and challenges faced by financiers, SMEs, and major customers in the realm of receivables finance.
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PROHIBITIONS ON ASSIGNMENT A study of BoAs for ABFA Hugh Beale and Louise Gullifer, with Anna Kloeden
Assignment of trade receivables Debtor BoA Creditor/ assignor Assignment Assignee
Assignment of trade receivables Customer BoA Supplier Assignment Receivables financier
Established wisdom on BoAs Important in loan agreements, where creditors may differ in flexibility and money not due at fixed time Unnecessary in contracts for supply of goods or services (trade receivables) Money due at fixed time Goods or services already supplied Debtor will not care who debtor is Used only By accident To prevent assignment of obligations or sub-contracting When large customer can impose Easier because can ignore notice, etc Major barrier to receivables financing RF cannot check receivables contracts for BoAs Cannot provide credit
BoAs rendered ineffective US: UCC s 9-406(d) BoAs in trade receivables of no effect against the debtor Assignor may be liable to Debtor in damages for breach Canada, NZ: Personal Property Security Acts Unidroit Convention on International Factoring (1988), art 6 UN Convention on the Assignment of Receivables in International Trade (2001), art 9 Law Commission (Company Security Interests, 2005)
ABFA Survey To investigate case To be objective ABFA reimbursed Universities for time, research and travel expenses Face-to-face and telephone interviews Financiers One specializing in medium-size sector ( 3m- 15m) Three in SME market, invoice discounting and factoring Organisation introducing suppliers to financiers Website auctioning receivables Five small/medium-sized suppliers Organisation representing finance directors Two organisations that help SMEs find finance Two major customers (one manufacturing, one retail)
Right to sue If right to unpaid receivables held on trust, can assignee use Vandepitte procedure to force assignor to sue? Don King: no, would undermine BoA Barbados Trust v Bank of Zambia (obiter) Hooper, no Waller and Rix: yes For purposes of survey, assumed no
Are BOAS necessary? Customers claim: Debt may be disputed Goods/services defective Muddles over invoices Ghost invoices for goods/services not supplied Want to deal with known supplier, not RF Supplier has commercial interest in preserving good relationship with Customer May need right of set-off May have claim under other contract, e.g. for other goods that prove defective after paid for Once notice, no new set-offs
Impossible to check Most SMEs have relatively few customers (or few regular customers) Customers have standard practices Not hard to check suppliers contracts Often can negotiate waiver
Major hindrance to RF Not to block discounting Non-notification Customer often not told Receivables paid into trust account What if supplier insolvent, outstanding receivables? RF cannot give notice to Customer Administrator/liquidator may have no interest in collecting money that will be paid to RF not to general creditors Solution RF also takes floating charge over supplier s undertaking Gives RF right to appoint Administrator Appoint friendly Administrator Possible problem: BoA may also prevent creation of charge over debt
Businesses that cant be trusted RFs say some SMEs can t be relied on to operate a trust account Will only finance on notification basis If no waiver, cannot offer finance
Internet sales of receivables Websites offer receivables to highest bidder Notification basis Not possible if BoA
Supply chain finance Large companies Have BoA Arrange RF with known financier, e.g. bank Combine with sophisticated invoicing Suppliers given barcode labels Logged into computer system when collected and checked on arrival at customer self-billing (i.e. Customer issues invoice to own finance Dept) Will allow factoring to approved RF
Is there a problem? Only larger companies offer supply chain finance Only to established suppliers [Discount rates said to be competitive, but??] So problem for Small businesses dealing with companies not offering SCF Start-up businesses Web-based schemes
Saskatchewan PPSA 1993 41(9): A term in a contract between a debtor on an account or on chattel paper and an assignor that prohibits or restricts assignment of the whole of the account or chattel paper for money due or to become due: (a) is binding on the assignor, but only to the extent of making the assignor liable in damages for breach of contract; and (b) is unenforceable against third parties. 2(1)(b): account means a monetary obligation that is not evidenced by chattel paper, an instrument or a security, whether or not it has been earned by performance;
Law Commission (Company Security Interests, 2005) A term in a contract between an account debtor and an assignor which prohibits or restricts assignment of the whole of the receivables for money due or to become due: (a) is binding on the assignor, but only to the extent of making the assignor liable in damages for breach of contract, but (b) is ineffective against assignees. (Draft Reg 35(5))
To what should the override apply? receivables means monetary obligations, whether or not earned by performance, arising from (a) the supply of goods or services (other than insurance services), (b) the supply of energy, or (c) brokerage fees, and sale , in relation to receivables, includes an agreement to sell.
