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Assignment of Receivables
3rd November 2017
The draft Business Contract Terms (Assignment of Receivables) Regulations 2017 (the “ Draft Regulations “) are currently before Parliament. If approved, these would contain provisions to nullify contract terms which attempt to restrict the ability of a party to assign a receivable.
In December 2014, the Department for Business, Innovation & Skills (BIS) consulted on an earlier version of the Draft Regulations. These earlier regulations contained a provision that allowed a party to rely on a confidentiality clause to prevent assignment of a receivable. This was included in the event that a debtor is unwilling for a receivable to be assigned because the disclosure of the debt to a third party compromises the debtor’s confidentiality. In August 2015, BIS published a response to the consultation.
Businesses often have to wait for a considerable length of time to be paid, which can cause cash flow issues. As a way of raising finance, a business may choose to assign an unpaid invoice to a third party, such as an invoice finance provider. This works by the finance provider lending the money to the business on the basis that the invoice is assigned to the finance provider. The finance provider will then pursue the debtor for the unpaid amount which will cover the earlier loans to the business.
Most contracts contain boilerplate provisions preventing the assignment of any rights under the contract unless the other party consents. A receivable is a right to be paid and a boilerplate non-assignment clause is broad enough to prevent invoices from being assigned.
Certain contracts are excluded from these rules. These include contracts for: an interest in land; for financial services; consumers where one or more of the parties is acting for purposes which are outside a trade, business or profession; for national security; and for certain energy and petroleum contracts.
Noticeably, the Draft Regulations do not include the confidentiality clause that was included in the earlier version.
Controversially, “assignment” is not defined. It is clear that this law would apply to outright assignments of receivables, but it is unclear the extent which it will apply to security interests. On the face of it, the new law will extend to security assignments but not charges or trusts. This may have the result that the parties cannot prevent a security assignment but can prevent a lesser interest such as a charge.
One of the reasons why restrictions on assignment are included in contracts is to protect the payer from having to pay more to an assignee than it would have to pay to the assignor. However, there is nothing in the Draft Regulations to protect the payer. It can only rely on its rights under the general law, which are extensive but not as good as an effective prohibition on assignment.
If approved, the Draft Regulations will not only apply to small companies. It will also read so that it covers all contracts, including those in existence at the time the new law comes into effect, which is expected to be in November or December 2017.
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Introduction The Factoring Regulation Act,2011 (‘Act’ for short) was enacted to provide for and regulate assignment of receivables by making provisions for registration therefore and rights and obligations of parties to contract for assignment of receivables and for matters connected therewith or incidental thereto. This act extends to whole of India. The provisions of this Act shall have effect, notwithstanding any thing inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Definitions for important terms Section 2(i) defines the term ‘factor’ as a non banking financial company as defined in Section 45-I (f) of the Reserve Bank of India Act, 1934 which has been granted a certificate of registration under Section 3(1) or any body corporate established under an Act of Parliament or any State Legislature or any bank or any company registered under the Companies Act, 1956 engaged in the factoring business. Section 2(j) of the Act defines the term ‘factoring business’ as the business of acquisition of receivables of assignor by accepting assignment of such receivables or financing, whether by way of making loans or advances or otherwise against the security interest over any receivables but does not include-
Section 2(p) defines the term ‘receivables’ as 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. Registration of Factors Every factor shall make an application for registration to RBI in the prescribed form and in the manner prescribed. A company registered as a NBFC and existing on the commencement of this Act and engaged in factoring business as its principal business before such commencement shall make an application for registration as a factor to the RBI before the expiry of the period of six months from such commencement and, notwithstanding anything contained may continue to carry on the factoring business until a certificate of registration is issued to it or rejection of application for registration is communicated to it. Every applicant for grant of a certificate of registration as a factor shall comply for the purpose of registration, with all requirements to be fulfilled by an applicant for grant of certificate of registration as NBFC under RBI Act, 1934 and all the provisions of that Act so far as they relate to registration of NBFC, shall mutatis mutandis apply. Assignment of receivables Any assignor may, by an agreement in writing assign any receivable due and payable to him by any debtor, to any factor, being the assignee, for a consideration as may be agreed between the assignor and the assignee and the assignor shall at the time of such assignment, disclose to the assignee any defences and right of set off that may be available to the debtor. On execution of assignment in writing all the rights, remedies and any security interest created over any property exclusively to secure the due payment of receivable shall vest in the assignee and the assignee shall have an absolute right to recover such receivable and exercise all the rights and remedies of the assignor whether by way of damages or otherwise or whether notice of assignment is given or not. Non applicability Section 31 of the Act provides that the provisions of this Act shall not apply to any assignment of receivables arising under or from the following transactions:
Notice mandatory Any assignee of a receivable shall not be entitled to demand payment of the receivable from the debtor in respect of receivables unless notice of such assignment is given to the debtor by the assignor or the assignee along with express authority in its favor granted by the assignor. Rights and obligations Chapter IV of the Act deals with the rights and obligations of the parties to contract for assignment of receivables. The debtor is having the right to notice of assignment before any demand is made on it by the assignee and until notice is served on the debtor, the debtor shall be entitled to make payments to the assignor in respect of the assigned receivable in accordance with the original contract and such payment shall fully discharge the debtor from corresponding liability under the original contract. Where a notice of assignment is served the debtor shall-
Where a debtor makes any payment to an assignor which represents payments due on an assigned receivable, such payment shall be deemed to be for the benefit of the assignee and the assignor shall be deemed to have received the amount of such payment as a trustee of the assignee and the assignor shall make payment of such amount to the assignee. If the assignor of receivable is a micro or small enterprise, the liability of the debtor to make payment due on assigned receivables shall be subject to the provisions contained in Sections 15 to 17 of the Micro, Small and Medium Enterprises Development Act, 2006 with regards to the delayed payments of the receivables. In case of delay of payment, the assignee shall be entitled to receive interest for the delayed period and shall take steps under the provisions of Micro and Medium Enterprises Development Limited Act, 2006 for the purpose of recovery of the interest and shall pay such interest to the micro or small enterprise. Except as provided in the Act any assignment of the receivables shall not without the express consent of the debtor in writing, affect the rights and obligations of the debtor. Consequent upon the assignment of receivables, the payment instruction under the contract entered into between assignor and debtor may modify the name of person, address or account to which the debtor is required to make payment, but such instruction shall not modify-
In a claim by the assignee against the debtor for payment of the assigned receivable, the debtor may raise against the assignee-
Any agreement made before service of the notice of the assignment of a receivable that affects the assignee’s rights in respect of that receivable shall be effective as against the assignee and the assignee shall acquire rights in the assigned receivables, as modified by such agreement. Any agreement made, after the notice that affects the assignee’s rights shall be ineffective as against the assignee unless-
If the assignee commits any breach of the original contract with the debtor, such breach shall not entitle the debtor to recover from the assignee any sum paid by the debtor to the assignee or the assignee pursuant to the factoring transactions. Registration of assignments Chapter V of the Act deals with the registration of assignments. The following is the procedure for registration of assignments and the matters incidental thereto:
Public inspection The particulars of transactions entered in the Central Register shall be open during business hours for inspection by any person on payment of prescribed fee, The Central Register maintained in electronic form shall also be open during the business hours or such extended hours as may be specified by the Central Registry for inspection by any person through electronic media on payment of prescribed fee. Offences and penalties If there is any default in registration of assignments such company and every officer of the company who is in default shall be punishable with fine which may extend to ₹ 5,000/- for every day during which the default continues. If any factor fails to comply with any direction of RBI the RBI may impose a penalty which may extend to ₹ 5 lakhs and in the case of a continuing offence, with an additional fine which may extend to ₹ 10,000/- for every day during which the default continues. If any person contravenes or attempts to contravene or abets the contravention of the provisions of the Act or of any rules made there under, for which no specific penalty has been provided for, he shall be punishable with imprisonment for a term which may extend to one year or with fine or with both. By: Mr. M. GOVINDARAJAN - January 5, 2015 Quick Updates:
IFSCA Guidelines on Factoring and Forfaiting of ReceivablesInternational Financial Services Centres Authority F. No 172/ IFSCA/Finance Company Regulations/2021-22/10 August 17, 2021 All IFSC Banking Units /Finance Companies/Finance Units/Participants on ITFS platform in the International Financial Services Centre (IFSC) Subject: Guidelines on Factoring and Forfaiting of Receivables Reference is drawn to the International Financial Services Centres Authority (Finance Company) Regulations, 2021 (hereinafter referred to as ‘Finance Company Regulations’) which have been notified in the official gazette on March 25, 2021. 2. The International Financial Services Centres Authority (hereinafter referred to as “Authority”), in order to regulate the Factoring and Forfaiting activity as mentioned in regulation 5(1)(i)(b) of the Regulations by the Finance Company/ Finance Unit in the International Financial Services Centre (hereinafter referred to as “IFSC”) in India, directs the entities concerned to follow the Guidelines as specified below: 3. Applicability 3.1 These Guidelines shall be applicable to Finance Companies / Finance Units registered with the Authority under regulation 3 of the Regulations that are intending to undertake the activity of Factoring and Forfaiting of receivables. 3.2 Part I of these Guidelines shall be applicable to IFSC Banking Units (‘IBUs’) licensed by the Authority under IFSC (Banking) Regulations, 2020, to undertake permissible activities subject to such prudential regulations as may be applicable to them. 3.3 Part I of these Guidelines shall also be applicable to all participants registered on ‘ITFS Platform’ for undertaking permissible Factoring and Forfaiting transactions under the Framework for setting up of International Trade Financing Services Platform (‘ITFS’) for providing trade finance services at International Financial Services Centres (‘IFSCs’) dated July 9, 2021. 4. Definitions For the purpose of implementation of these Guidelines the following definitions shall be referred to: (i) “Assignment” means transfer by agreement to a factor of an undivided interest, in whole or in part, in the receivables of an assignor due from a debtor; (ii) “Assignee” means a factor in whose favour the receivable is transferred; (iii) “Assignor” means any person who is the owner of any receivable; (iv) “Debtor” means any person liable to the assignor, whether under a contract or otherwise, to pay any receivable or discharge any obligation in respect of the receivable whether existing, accruing, future, conditional or contingent; (v) “Factor” means an entity engaged in the factoring business in the IFSC and includes a Financier under ITFS framework; (vi) “Factoring business” means the business of acquisition of receivables of assignor by accepting assignment of such receivables or financing, whether by way of making loans or advances or otherwise against the security interest over any receivables but does not include: (a) credit facilities provided by an IBU or a Finance Company/Finance Unit in its ordinary course of business against security of receivables; (b) any activity as commission agent or otherwise for sale of agricultural produce or goods of any kind whatsoever or any activity relating to the production, storage, supply, distribution, acquisition or control of such produce or goods or provision of any services. (vii) “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; (viii) “Forfaiter” means an entity engaged in the forfaiting business in the IFSC and includes Financiers under ITFS framework; (ix) “Forfaiting business” means sale and purchase of the receivables on a without recourse basis, as permitted under these Guidelines; (x) “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 (by whatever name called), of the transactions admitted for settlement at a future date so that only a net claim be demanded or a net obligation be owned; (xi) “Receivables” means the money owed by a debtor and not yet paid to the assignor for goods or services and includes payment of any sum (by whatever name called) required to be paid for the toll or for the use of any infrastructure facility or services. All other words and expressions used but not defined in these Guidelines shall have the same meaning respectively assigned to them under IFSC (Banking) Regulations, 2020, ITFS Framework and Finance Company Regulations. Guidelines on Factoring and Forfaiting transactions A. Guidelines on Factoring of Receivables 5. Assignment of receivables 5.1 Any assignor may, by an agreement in writing, assign any receivable due and payable to him by any debtor, to any factor, being the assignee, for a consideration as may be agreed between the assignor and the assignee and the assignor shall at the time of such assignment, disclose to the assignee any defences and right of set off that may be available to the debtor. 5.2 On execution of agreement in writing for assignment of receivables, all the rights, remedies and any security interest created over any property exclusively to secure the due payment of receivable shall vest in the assignee and the assignee shall have an absolute right to recover such receivable and exercise all the rights and remedies of the assignor whether by way of damages or otherwise, or whether notice of assignment as provided in clause 6 below is given or not. 5.3 Where an assignment of receivables constituting security for repayment of any loan advanced by a creditor and where the assignor, with the written consent of such creditor, has given notice of such encumbrance to the assignee, on acceptance of such assignment, the assignee shall pay the consideration for such assignment to the creditor. 6. Notice to debtor and discharge of obligation of such debtor An assignee of a receivable shall not be entitled to demand payment of the receivable from the debtor in respect of such receivables unless notice of such assignment is given to the debtor by the assignor or the assignee along with express authority in its favor granted by the assignor. 7. Discharge of liability of debtor on payment to assignee Where a notice of assignment of receivable as stated in clause 6 above is given by the assignor or the assignee, as the case may be, the debtor on receipt of such notice, shall make payment to the assignee and payment made to such assignee in discharge of any obligation in relation to the receivables specified in the notice shall fully discharge the debtor making the payment, from corresponding liability in respect of such payment. 8. Payment made by debtor to assignor to be held in trust for benefit of assignee in certain cases Where no notice of assignment of receivables as stated in clause 6 above is given by the assignor or under his authority by the assignee, any payment made by the debtor in respect of such receivables to the assignor shall be held in trust for the benefit of the assignee which shall be forthwith be paid over to such assignee or its agent duly authorized in this behalf. 9. Assignor prohibition The conclusion by an Assignor regarding assignment of receivables with more than one assignee, at a time, in connection to the same invoice, is forbidden, and any such contracts shall be void. Any fraudulent breach of this provision shall be punishable in accordance with the provisions of the applicable law. 10. Rights and obligations of parties to contract for assignment of receivables Without prejudice to the provisions contained in any other law for the time being in force, the debtor shall have the right to notice of assignment as stated in clause 6 above, before any demand is made on it by the assignee and until notice is served on the debtor, the debtor shall be entitled to make payments to the assignor in respect of assigned receivables in accordance with the original contract and such payment shall fully discharge the debtor from corresponding liability under the original contract. 11. Liability of debtor Where a notice of assignment is served as stated in clause 6 above, the debtor shall, (i) intimate the assignee the details of the deposits or advance or payment on account made to the assignor before the receipt of notice of assignment and also provide any other information to the assignee relating to the receivable as and when called upon by the assignee to do so; (ii) not be entitled to a valid discharge of its liability in respect of assigned receivables, unless it makes the payment due on an assigned receivable to the assignee; (iii) in the event of delay in payment by it, pay the receivable along with the interest as per the original contract or as agreed between the parties. 12. Assignor to be trustee of assignee Notwithstanding anything to the contrary contained in any other law for the time being in force, where a debtor makes any payment to an assignor which represents payment due on an assigned receivable, such payment shall be deemed to be for the benefit of the assignee, and the assignor shall be deemed to have received the amount of such payment as a trustee of the assignee and the assignor shall make payment of such amount to the assignee. 13. Principle of debtor protection 13.1 Unless otherwise specified in these Guidelines, any assignment of the receivable shall not, without the express consent of the debtor in writing, affect the rights and obligations of the debtor (including the terms and conditions of the contract) 13.2 Consequent upon the assignment of receivables, the payment instruction under the contract entered into between assignor and debtor may modify the name of person, address or account to which the debtor is required to make payment, but such instructions shall not modify: (i) The amount of debt specified in the original contract. (ii) The date on which payment is to be made or other terms of the original contract relating to payment. (iii) The place specified in the original contract at which payment is to be made or in case no such place is mentioned in the contract, the place of payment to a place other than where the debtor is situated. 14. Defences and right of set off of debtor In a claim by the assignee against the debtor for payment of the assigned receivable, the debtor may raise against the assignee: (i) all defences and right of set off arising from the original contract, entered into between the assignor and debtor or any other contract that was part of the same transaction, of which the debtor could avail himself as if the assignment had not been made and such claim were made by the assignor instead of assignee. Provided that the assignee shall, unless otherwise agreed between the parties, be entitled to recover from the assignor, any loss suffered by it as a result of any such defences and right of set off being exercised by the debtor; (ii) any other right of set off, if it was available to the debtor at the time of notice of the assignment, as stated in clause 6 above, was received by the debtor. 15. Agreement not to raise defences or rights of set-off 15.1. The debtor may agree with the assignor in writing not to raise against the assignee, the defences and rights of set-off that it could raise pursuant to the above clause. Such an agreement precludes the debtor from raising against the assignee those defences and rights of set-off. 15.2. The debtor may not waive defences: (i) arising from fraudulent acts on the part of the assignee; or (ii) based on the debtor’s incapacity. 16. Modification of original contract 16.1 Any agreement made before service of notice of the assignment of a receivable, as stated in clause 6 above, between the assignor and the debtor that affects the assignee’s rights in respect of that receivable, shall be effective as against the assignee, and the assignee shall acquire rights in the assigned receivables, as modified by such agreement. 16.2 Any agreement made after notice of the assignment between the assignor and the debtor that affects the assignee’s rights shall be ineffective as against the assignee unless: (i) the assignee consents to it or, (ii) the receivable is not fully earned by performance and either the modification is provided for in the original contract or, in the context of the original contract, a reasonable assignee would consent to the modification. 16.3 Nothing contained in sub-clauses (16.1) and (16.2) shall affect any right of the assignor or the assignee arising from breach of an agreement between them. 17. Breach of Contract If the assignor commits any breach of the original contract with the debtor, such breach shall not entitle the debtor to recover from the assignee any sum paid by the debtor to the assignor or the assignee pursuant to the factoring transactions: Provided however that nothing contained in this clause shall affect the rights of the debtor to claim from the assignor any loss or damages caused to him by reason of breach of the original contract. 18. Provisions of these Guidelines not to apply in certain cases The provisions of factoring Guidelines shall not apply to any assignment of receivables arising under or from the following transactions, namely: (i) any merger, acquisition or amalgamation of business activities or sale or change in the ownership or legal status of business; (ii) any assignment of loan receivables by an IBU or Finance company/Finance unit to another IBU or Finance company/Finance unit; (iii) securitization transactions (including assignment of receivables to special purpose vehicles or trusts that issue securities against such receivables, bought from a single debtor or single group of debtors); (iv) financial contracts governed by netting agreements, except a receivable owed on the termination of all outstanding transactions; (v) transactions on a recognised exchange; (vi) foreign exchange transactions except receivables; (vii) inter-bank payment systems, inter-bank payment agreements or clearance and settlement systems relating to securities or other financial assets or instruments; (viii) bank deposits; (ix) sale of goods or services for any personal, family or household use; (x) letter of credit or independent guarantee; (xi) a bilateral contract entered with the supplier the terms of which mandates the contract to be governed by the law of a country other than India; or (xii) any other transaction(s) that may be specified by the Authority. 19. General Guidelines on risk management for undertaking factoring transactions The assignee undertaking factoring business shall ensure proper and adequate control and reporting mechanisms including but not limited to: (i) Assignee shall carry out a thorough credit appraisal of the debtors before entering into any factoring arrangement or prior to establishing lines of credit with the factor. (ii) Factoring services shall be extended in respect of receivables which represent genuine trade transactions which are not void in nature and are not pertaining to any trade in dispute. (iii) Assignee must be fully aware of the risks involved in factoring transactions such as sovereign risk, country risk, currency risk, transfer risk and documentation risk and credit risk. (iv) Every Factor and/or ITFS on behalf of the Factor, as the case may be, shall register the particulars of every transaction of assignment of receivables in its favour with the Central Registry set-up under section 20 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), within the prescribed timelines from the date of such assignment, wherever applicable. (v) Assignee may purchase credit insurance for its exposure from insurers in the IFSC or shall comply with provisions of Sec 2CB of the Insurance Act, 1938 for purchase of such insurance. B. Guidelines on Forfaiting of Receivables 20. The following shall be adhered to while undertaking Forfaiting business by a Forfaiter: (i) Receivable shall be a negotiable instrument. (ii) Non-recourse to the Seller/Assignor. (iii) Notice should be given to debtor whenever there is rediscounting of bill, by Forfaiter. (iv) Payment by the importer/debtor must be guaranteed by a third party. (v) Adequate safeguards of Information Technology should be placed and Information Technology audit must be done regularly by all the entities as per clause 3 above, undertaking forfaiting activity must ensure that its contractual documents should specify the legal jurisdiction where the case will be resolved in the case of any dispute. (vi) All the entities as per clause 3 above, must ascertain the accuracy of information provided by the exporter so as not to prejudice any rights, if there is a breach of warranties. (vii) All Entities in IFSC undertaking forfaiting transactions shall adhere to International Chamber of Commerce Uniform Rules for Forfaiting (URF 800) (viii) All the entities as per clause 3 above, while undertaking forfaiting transactions shall adopt appropriate risk management policies as indicated in clause 19 above. 21. Powers of Authority to give directions and to collect information from factor/forfeiter 21.1 The Authority may, at any time, by general or special order, direct that every factor/forfaiter shall furnish to it, in such form, at such intervals and within such time, such statements, information or particulars relating to factoring/forfaiting business undertaken by them, as may be specified by the Authority from time to time. 21.2 The Authority may, if it considers necessary in the interest of business enterprises availing factoring/forfaiting services or in the interest of factor/forfaiter or interest of other stake holders give directions to a factor/forfaiter either generally or in particular or group of factors/forfaiters in respect of any matters relating to or connected with the factoring/forfaiting business undertaken by them. 21.3 If any factor/forfaiter fails to comply with any direction given by the Authority under sub-clause (21 .2), the Authority may prohibit such factor/forfaiter from undertaking the factoring/forfaiti ng business, Provided that before prohibiting any factor/forfaiter from undertaking the factoring/forfaiting business, the factor/forfaiter shall be given a reasonable opportunity to file its written submissions. 22. All the entities as per clause 3 above, shall ensure compliance with these factoring and forfaiting Guidelines in addition to other applicable laws. Prudential Guidelines 23. In addition to the above Guidelines, the Finance Company /Finance Unit undertaking factoring and/or forfaiting transactions shall adhere to the provisions of IFSCA (Finance Company) Regulations, 2021 and the Guidelines/Circulars issued thereunder. 24. Recognition of Non-Performing Assets (NPA) 24.1 The receivable acquired under factoring which is not paid by the due date, should be treated as NPA irrespective of when the receivable was acquired by the factor or whether the factoring was carried out on “recourse basis” or “non-recourse” basis. The entity on which the exposure was booked should be shown as NPA and provisioning be made accordingly. 24.2 For the Purpose of asset classification and provisioning, the Circular bearing F. No 172/ IFSCA/Finance Company/Unit Regulations/2021-22/3’ dated May 03, 2021 , on ‘Prudential Regulations and activity specific Guidelines’ issued by IFSCA, shall be adhered to. 25. Since under “without recourse” factoring transactions, the Finance Company/ Finance Unit is underwriting the credit risk on the debtor, there should be a clearly laid down Board-approved limit for all such underwriting commitments. 26. The Finance Company/ Finance Unit shall have a Board approved risk mitigation strategy or policy for identified risks while undertaking factoring and forfaiting business. 27. The factoring and forfaiting transactions shall be covered with the overall exposure ceiling as per the Authority’s circular bearing ‘F. No 172/ IFSCA/Finance Company/Unit Regulations/2021-22/6’ dated, May 25, 2021 on ‘Framework on Computation of Exposure Ceiling for Finance Companies/Finance Units’, as applicable. The exposure shall be reckoned as under: (i) In case of factoring on “with-recourse” basis, the exposure would be reckoned on the assignor. (ii) In case of factoring on “without-recourse” basis, the exposure would be reckoned on the debtor, irrespective of the credit risk cover! protection provided, except in cases of international factoring where the entire credit risk is assumed by import factor. Miscellaneous 28. This Circular is issued in exercise of powers conferred by section 12 of the International Financial Services Centres Authority Act, 2019 to develop and regulate the financial products, financial services and financial institutions in the International Financial Services Centres. 29. A copy of this Circular is available on the website of the Authority at www. ifsca.gov.in/circular. Yours faithfully (R. Kumar) Head, Department of Banking [email protected]
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Receivables Finance And The Assignment Of ReceivablesTfg legal trade finance hub, receivables finance and the assignment of receivables. A receivable represents money that is owed to a company and is expected to be paid in the future. Receivables finance, also known as accounts receivable financing, is a form of asset-based financing where a company leverages its outstanding receivables as collateral to secure short-term loans and obtain financing. In case of default, the lender has a right to collect associated receivables from the company’s debtors. In brief, it is the process by which a company raises cash against its own book’s debts. The company actually receives an amount equal to a reduced value of the pledged receivables, the age of the receivables impacting the amount of financing received. The company can get up to 90% of the amount of its receivables advanced. This form of financing assists companies in unlocking funds that would otherwise remain tied up in accounts receivable, providing them with access to capital that is not immediately realised from outstanding debts.  FIG. 1: Accounts receivable financing operates by leveraging a company’s receivables to obtain financing. Source: https://fhcadvisory.com/images/account-receivable-financing.jpg Restrictions on the assignment of receivables – New legislationInvoice discounting products under which a company assigns its receivables have been used by small and medium enterprises (SMEs) to raise capital. However, such products depend on the related receivables to be assignable at first. Businesses have faced provisions that ban or restrict the assignment of receivables in commercial contracts by imposing a condition or other restrictions, which prevents them from being able to use their receivables to raise funds. In 2015, the UK Government enacted the Small Business, Enterprise and Employment Act (SBEEA) by which raising finance on receivables is facilitated. Pursuant to this Act, regulations can be made to invalidate restrictions on the assignment of receivables in certain types of contract. In other words, in certain circumstances, clauses which prevent assignment of a receivable in a contract between businesses is unenforceable. Especially, in its section 1(1), the Act provides that the authorised authority can, by regulations “make provision for the purpose of securing that any non-assignment of receivables term of a relevant contract:
The underlying aim is to enable SMEs to use their receivables as financing to raise capital, through the possibility of assigning such receivables to another entity. The aforementioned regulations, which allow invalidations of such restrictions on the assignment of receivables, are contained in the Business Contract Terms (Assignment of Receivables) Regulations 2018, which will apply to any term in a contract entered into force on or after 31 December 2018. By virtue of its section 2(1) “Subject to regulations 3 and 4, a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.” Such regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. However, there are several exclusions to this rule. In section 3, an exception exists where the supplier is a large enterprise or a special purpose vehicle (SPV). In section 4, there are listed exclusions for various contracts such as “for, or entered into in connection with, prescribed financial services”, contracts “where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession” or contracts “where none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom”. Also, specific exclusions relate to contracts in energy, land, share purchase and business purchase. Effects of the 2018 RegulationsAs mentioned above, any contract terms that prevent, set conditions for, or place restrictions on transferring a receivable are considered invalid and cannot be legally enforced. In light of this, the assignment of the right to be paid under a contract for the supply of goods (receivables) cannot be restricted or prohibited. However, parties are not prevented from restricting other contracts rights. Non-assignment clauses can have varying forms. Such clauses are covered by the regulations when terms prevent the assignee from determining the validity or value of the receivable or their ability to enforce it. Overall, these legislations have had an important impact for businesses involved in the financing of receivables, by facilitating such processes for SMEs. Digital platforms and fintech solutions: The assignment of receivables has been significantly impacted by the digitisation of financial services. Fintech platforms and online marketplaces have been developed to make the financing and assignment of receivables easier. These platforms employ tech to assess debtor creditworthiness and provide efficient investor and seller matching, including data analytics and artificial intelligence. They provide businesses more autonomy, transparency, and access to a wider range of possible investors. Securitisation is an essential part of receivables financing. Asset-backed securities (ABS), a type of financial instrument made up of receivables, are then sold to investors. Businesses are able to turn their receivables into fast cash by transferring the credit risk and cash flow rights to investors. Investors gain from diversification and potentially greater yields through securitisation, while businesses profit from increased liquidity and risk-reduction capabilities. References: https://www.tradefinanceglobal.com/finance-products/accounts-receivables-finance/ – 28/10/2018 https://www.legislation.gov.uk/ukpga/2015/26/section/1/enacted – 28/10/2018 https://www.legislation.gov.uk/ukdsi/2018/9780111171080 – 28/10/2018 https://www.bis.org/publ/bppdf/bispap117.pdf – Accessed 14/06/2023 https://www.investopedia.com/terms/a/asset-backedsecurity.asp – Accessed 14/06/2023 https://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf – Accessed 14/06/2023  International Trade Law1 | Introduction to International Trade Law 2 | Legal Trade Finance 3 | Standard Legal Charges 4 | Borrowing Base Facilities 5 | Governing law in trade finance transactions 6 | SPV Financing 7 | Guarantees and Indemnities 8 | Taking security over assets 9 | Receivables finance and the assignment of receivables 10 | Force Majeure 11 | Arbitration 12 | Master Participation Agreements 13 | Digital Negotiable Instruments 14 | Generative AI in Trade Law Access trade, receivables and supply chain financeContact the trade team, speak to our trade finance team, want to learn more about trade finance download our free guides.  Learn more about Legal Structures in Trade Finance Digital Negotiable Instruments Electronic Signatures Force Majeure Master Risk Participation Agreements In Trade Finance What is a Creditor?What is a debtor (debitor).  About the AuthorTrade Finance Global (TFG) assists companies with raising debt finance. While we can access many traditional forms of finance, we specialise in alternative finance and complex funding solutions related to international trade. We help companies to raise finance in ways that is sometimes out of reach for mainstream lenders. 
Ushering a New Era for ARCs: Stamp Duty Exemption on AssignmentsAbout the author.  Umakanth VarottilUmakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India. Cancel replySave my name, email, and website in this browser for the next time I comment. Notify me of follow-up comments by email. Notify me of new posts by email. any assignment agreement prior to the amendment will also be not required to pay stamp duty?
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The Factoring Regulation (Amendment) Bill, 2020
DISCLAIMER: This document is being furnished to you for your information. You may choose to reproduce or redistribute this report for non-commercial purposes in part or in full to any other person with due acknowledgement of PRS Legislative Research (“PRS”). The opinions expressed herein are entirely those of the author(s). PRS makes every effort to use reliable and comprehensive information, but PRS does not represent that the contents of the report are accurate or complete. PRS is an independent, not-for-profit group. This document has been prepared without regard to the objectives or opinions of those who may receive it. PRS Products Original TextEducation(Graduation) : Education(Post Graduation) : GST on assignment of receivables: Wrong path to the right destinationTeam Vinod Kothari Consultants P. Ltd There has been a lot of uncertainty on the issue of exigibility of direct assignments and securitisation transactions to goods and services tax (GST). While on one hand, there have been opinions that assignments of secured debts may be taxable being covered by the circuitous definition of “actionable claims”, there are other views holding such assignments of debts (secured or unsecured) to be non-taxable since an obligation to pay money is nothing but money, and hence, not “goods” under the GST law [1] . The uncertainty was costing the market heavily [2] . In order to put diverging views to rest, the GST Council came out with a set of Frequently Asked Questions on Financial Services Sector [3] , trying to clarify the position of some arguable issues pertaining to transactions undertaken in the financial sector. These FAQs include three separate (and interestingly, mutually unclear) questions on – (a) assignment or sale of secured or secured debts [Q.40], (b) whether assignment of secured debts constitutes a transaction in money [Q.41], and (c) securitisation transactions undertaken by banks [Q.65]. The end-result arising out of these questions is that there will be no GST on securitisation transactions. However, the GST Council has relied on some very intriguing arguments to come to this conclusion – seemingly lost between the meaning of “derivatives”, “securities”, and “actionable claims”. If one does not care about why we reached here, the conclusion is most welcome. However, the FAQs also reflect the serious lack of understanding of financial instruments with the Council, which may potentially create issues in the long run. In this note [4] we intend to discuss the outcome of the FAQs, but before that let us first understand what the situation of the issue was before this clarification. Situation before the clarification
“(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;” Services have been defined in section 2(102) of the CGST Act oin in the following manner: ““services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;” Money, is therefore, excludible from the scope of “goods” as well as “services”. Section 7 details the scope of the expression “supply”. According to the section, “supply” includes “all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.” However, activities as specified in Schedule III of the said Act shall not be considered as “supply”. It may be noted here that “Actionable claims, other than lottery, betting and gambling” are enlisted in entry 6 of Schedule III of the said Act; therefore are not exigible to GST.
Coming to the definition of “money”, it has been defined under section 2(75) as follows – ““money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.” The definition above enlists all such instruments which have a “value-in-exchange”, so as to represent money. A debt also represents a sum of money and the form in which it can be paid can be any of these forms as enlisted above. So, in effect, a receivable is also a sum of “money”. As such, receivables shall not be considered as “goods” or “services” for the purpose of GST law.
Section 2(1) of the CGST Act defines “actionable claim” so as to assign it the same meaning as in section 3 of the Transfer of Property Act, 1882, which in turn, defines “actionable claim” as – “actionable claim” means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent;” It may be noted that the inclusion of “actionable claim” is still subject to the exclusion of “money” from the definition of “goods”. The definition of actionable claim travels beyond “claim to a debt” and covers “claim to any beneficial interest in movable property”. Therefore, an actionable claim is definitely more than a “receivable”. Hence, if the actionable claim represents property that is money, it can be held that such form of the actionable claim shall be excluded from the ambit of “goods”. There were views in the industry which, on the basis of the definition above, distinguish between — (a) a debt secured by mortgage of immovable property, and a debt secured by hypothecation/pledge of movable property on one hand (which are excluded from the definition of actionable claim); and (b) an unsecured debt on the other hand. However, others opined that a debt, whether secured or unsecured, is after all a “debt”, i.e. a property in money; and thus can never be classified as “goods”. Therefore, the entire exercise of making a distinction between secured and unsecured debt may not be relevant at all. In case it is argued that a receivable which is secured (i.e. a secured debt) shall come within the definition of “goods”, it must be noted that a security granted against a debt is merely a back-up, a collateral against default in repayment of debt.
“. . . supply is not a boundless word of uncertain meaning. The inclusive part of the opening words in this clause may be understood to include everything that supply is generally understood to be PLUS the ones that are enlisted. It must be admitted that the general understanding of the world supply is but an amalgam of these 8 forms of supply. Any attempt at expanding this list of 8 forms of supply must be attempted with great caution. Attempting to find other forms of supply has not yielded results however, transactions that do not want to supply have been discovered. Transactions of assignment where one person steps into the shoes of another appears to slip away from the scope of supply as well as transactions where goods are destroyed without a transfer of any kind taking place.” Also, as already stated, where the object is neither goods nor services, there is no question of being a supply thereof.
Situation after the clarification
Section 2(52) of the CGST Act, 2017 defines ‘goods’ to mean every kind of movable property other than money and securities but includes actionable claim. Schedule III of the CGST Act, 2017 lists activities or transactions which shall be treated neither as a supply of goods nor a supply of services and actionable claims other than lottery, betting and gambling are included in the said Schedule. Thus, only actionable claims in respect of lottery, betting and gambling would be taxable under GST. Further, where sale, transfer or assignment of debts falls within the purview of actionable claims, the same would not be subject to GST. Further, any charges collected in the course of transfer or assignment of a debt would be chargeable to GST, being in the nature of consideration for supply of services.
Sale, purchase, acquisition or assignment of a secured debt does not constitute a transaction in money; it is in the nature of a derivative and hence a security.
Securitized assets are in the nature of securities and hence not liable to GST. However, if some service charges or service fees or documentation fees or broking charges or such like fees or charges are charged, the same would be a consideration for provision of services related to securitization and chargeable to GST.
However, the second part of the answer needs further discussion. The second part of the answer states that – any charges collected in the course of transfer or assignment of a debt would be chargeable to GST, being in the nature of consideration for supply of services. There are multiple charges or fees associated in an assignment or securitisation transaction – such as servicing fees or excess spread. While it is very clear that the GST will be chargeable on servicing fees charged by the servicer, there is still a confusion on whether GST will be charged on the excess spread or not. Typically, transactions are devised to give residuary sweep to the originator after servicing the PTCs. Therefore, there could be a challenge that sweep right is also a component of servicing fees or consideration for acting as a servicing agent. The meaning of consideration [6] under the CGST Act is consideration in any form and the nomenclature supports the intent of the transaction. Since, the originator gets the excess spread, question may arise, if excess spread is in the nature of interest. This indicates the need for proper structuring of transactions, to ensure that either the sweep right is structured as a security, or the same is structured as a right to interest. One commonly followed international structure is credit-enhancing IO strip. The IO strip has not been tried in Indian transactions, and recommendably this structure may alleviate concerns about GST being applied on the excess spread.
While the intent of the GST Council is coming out very clear, but this view is lacking supporting logic. Neither the question discusses why assignments of secured receivables are not transactions in money, nor does it state why it is being treated as derivative. Our humble submission in this regard is that assignment of secured receivables may not be treated as derivatives. The meaning of the term “derivatives” have been drawn from section 2(ac) of the Securities Contracts (Regulation) Act, 1956, which includes the following – (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities. In the present case, assignment of receivables do not represent any security nor does it derive its value from anything else. The receivables themselves have an inherent value, which get assigned, the fact that it is backed a collateral security does not make any difference as the value of the receivables also factor the value of the underlying. Even though the logic is not coming out clear, the intent of the Council is coming out clearly and the efforts made by the Council to clear out the ambiguities is really commendable. [1] Refer: GST on Securitisation Transactions , by Nidhi Bothra, and Sikha Bansal, at http://vinodkothari.com/blog/gst-on-securitisation-transactions-2/ ; pg. last visited on 06.06.2018 [2] At the recently concluded Seventh Securitisation Summit on 25 th May, 2018, one leading originator confirmed that his company had kept transactions on hold in view of the GST uncertainty. It was widely believed that the dip in volumes in FY 2017-18 was primarily due to GST uncertainty. [3] http://www.cbic.gov.in/resources//htdocs-cbec/gst/FAQs_on_Financial_Services_Sector.pdf [4] Portions of this note have been adopted from the article – GST on Securitisation Transactions, by Nidhi Bothra and Sikha Bansal. [5] http://idtc-icai.s3.amazonaws.com/download/pdf18/Volume-I(BGM-idtc).pdf ; pg. last visited on 19.05.2018 [6] (31) “consideration” in relation to the supply of goods or services or both includes–– (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply; Leave a ReplyLeave a reply cancel reply. Your email address will not be published. Required fields are marked * Save my name, email, and website in this browser for the next time I comment. Subscribe to receive regular updates! | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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A contract is a bunch of mutual rights and obligations. Assignment of a contract would mean assignee steps in the shoes of the assignor and assumes all the rights and obligations of the assignor. For example: X enters into a contract of sale with Y where X is the seller. The contract would obviously provides for rights and obligations of either ...
Assignment of receivables would mean sale of the lease rentals, not the asset. In that case, the leased asset still remains the property of the assignor - that is, the assignor has retained the residual interest in the asset. However, it would be different if the lessor sells the asset that has been leased out.
The common law did give effect to three kinds of transactions, viz. novation, acknowledgement and power of attorney, which to some extent did the work of assignment.1 As per the Indian contract law, any type of contract may be assigned as long as there is consent involved in the assignment. It needs
Vinod Kothari Consultants Pvt.Ltd. Date - 9thApril, 2020. Kolkata: 1006-1009, Krishna 224 AJC Bose Road Kolkata - 700 017 Phone: 033 2281 3742/7715 Email: [email protected]. Website: www.vinodkothari.com New Delhi: A-467, First Floor, Defence Colony, New Delhi-110024 Phone: 011 6551 5340 Email: [email protected].
Section 4. Provisions of non-banking financial companies apply to factor. Section 5. Requirement for registration as a factor not to apply to bank or Statutory corporation or Government company. Section 6. Powers of Reserve Bank to give directions and to collect information from factors. Section 7. Assignment of receivables.
Article. Assignment of Receivables. 3rd November 2017. The draft Business Contract Terms (Assignment of Receivables) Regulations 2017 (the " Draft Regulations ") are currently before Parliament. If approved, these would contain provisions to nullify contract terms which attempt to restrict the ability of a party to assign a receivable.
The Factoring Regulation Act,2011 ('Act' for short) was enacted to provide for and regulate assignment of receivables by making provisions for registration therefore and rights and obligations of parties to contract for assignment of receivables and for matters connected therewith or incidental thereto. This act extends to whole of India.
India Code: Section Details. Section 7. Assignment of receivables. Previous Next. (1) Any assignor may, by an agreement in writing, assign any receivable due and payable to him by any debtor, to any factor, being the assignee, for a consideration as may be agreed between the assignor and the assignee and the assignor shall at the time of such ...
One day, you and your friends find it and amazed by its beauty, you make it your secret place to hang out or your secret playground about which nobody else knows. The Registration of Assignment of Receivables Rules, 2012 under the Factoring Regulation Act provide for the procedural requirements to be met in relation to the registration of the ...
The expression "assignment of receivables" has assumed significant importance in the world of contracts.Recently, assignment of receivables as a form of financing has met with phenomenal success across the globe. However, the law of assignments is governed by the principles of 19th century and there is a dire need of a separate statute in various jurisdictions for the same.
o Receivables can't be sold if there is an anti-assignment clause in the sale contract o Receivables can't be sold on a batch, future or undivided basis o Laws applicable to priority of claims in bankruptcy vague or uncertain; difficult to navigate conflicts of law • All of these problems make FIs skittish
The expression "assignment of receivables" has assumed significant importance in the world of contracts. Recently, assignment of receivables as a form of financing has met ... Contract Law in India, p. 171 19 Nilima Bhadbhade, Contract Law in India, p. 171 20 United India Fire And General v Pelaniappa Transport Carriers AIR (1986) AP 32 ...
3.1 These Guidelines shall be applicable to Finance Companies / Finance Units registered with the Authority under regulation 3 of the Regulations that are intending to undertake the activity of Factoring and Forfaiting of receivables. 3.2 Part I of these Guidelines shall be applicable to IFSC Banking Units ('IBUs') licensed by the Authority ...
[UPDATED 2024] A receivable is a debt, an incoming money that is owed to a company in the future. Receivables finance or also called accounts-receivable financing is a type of asset-financing whereby a company uses its receivables as collateral in receiving financing such as secured short-term loans. In case of default, the lender has a right to collect associated receivables from the company ...
Assignment of actionable claims/ receivables is achieved by an instrument, and such an instrument requires stamp duty. The United Kingdom (UK), Hong Kong, Malaysia and India are examples of jurisdictions where assignment agreements are liable to stamp duty. Currently, in India, stamp duty in case of assignment of actionable claims/ receivables is significantly high.
Dec 21, 2011. Dec 27, 2011. The Regulation of Factor (Assignment of Receivables) Bill, 2011 was introduced in the Lok Sabha on March 24, 2011 by the Minister of Finance Shri Pranab Mukherjee. The Bill seeks to regulate the business of factoring by providing a mechanism for assignment of receivables of an industry to a factor and payment of ...
For example, when an entity transfers (i) the rights to the first or the last 90 per cent of cash collections from a financial asset (or a group of financial assets), or (ii) the rights to 90 per cent of the cash flows from a group of receivables, but provides a guarantee to compensate the buyer for any credit losses up to 8 per cent of the ...
be an equitable assignment under English law. However, whether an assignment of receivables expressed as an outright sale is re-characterised as a secured loan does not depend on whether the sale is a legal assignment of existing receivables or an equitable assignment of future receivables. (Assignments of future receivables are not possible ...
Law of Assignment of Receivables. NBFC Master Directions 2016 - both integration and disintegration Auction my Junk: Banks to follow Swiss Challenge Method for sale of stressed...
The Bill amends the definition of receivables to mean any money owed by a debtor to the assignor for toll or for the use of any facility or services. Change in the definition of assignment: The Act defines assignment to mean transfer (by agreement) of undivided interest of any assignor in any receivable due from the debtor, in favour of the ...
There is no doubt that a "receivable" is a movable property. "Receivable" denotes something which one is entitled to receive. Receivable is therefore, a mirror image for "debt". If a sum of money is receivable for A, the same sum of money must be a debt for B. A debt is an obligation to pay, a receivable is the corresponding right ...