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Commercial Law — Financial law — Assignment of future receivables

Browse Subjects

• Convention on the Assignment of Receivables in International Trade (2001)
• RECEIVABLES FINANCING
• INTERNATIONAL TRADE
• TREATIES (TEXT)
• SIGNATURES, ACCESSIONS, RATIFICATIONS

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• Bankruptcy & Restructuring
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• European Union

The validity of an assignment of receivables cross-border depends on the law that applies to the assignment.

What might amount to a valid assignment in one jurisdiction does not mean that it is valid in another, and where there are competing claims to the receivables and competing jurisdictions, the question of which law applies - and therefore whether there has been a valid assignment - significantly affects the ability of the assignee to rely on the assignment.

This question arose in the context of a German bankruptcy where the issue was referred to the European Court of Justice (“ECJ “) for a preliminary ruling. The recent decision of the ECJ of 9 October 2019 surprised many because it went against the commonly held view that in determining jurisdictional questions Article 14 of the European Union Rome I Regulation applied.

In this blog we consider the implications of the ECJ judgment in Case C-548/18 BGL BNP Paribas SA vs. TeamBank AG Nürnberg and how this affects assignees and the priority of competing claims. We also consider the proposed EU Assignment Regulation and how that might assist in determining the question of jurisdiction in the future.

A national of Luxembourg (the “employee”) but resident of Germany was employed by a Luxembourg employer under Luxembourg law. A German bank granted a German law governed loan to the employee and the employee assigned to the German bank all its claims to receive remuneration from the Luxembourg employer.

Three months later the employee obtained another loan, this time from a Luxembourg bank and assigned the same remuneration claims as security for that second loan to the Luxembourg bank under a Luxembourg law governed assignment contract. The Luxembourg bank notified the assignment to the Luxembourg employer, the German bank did not do so.

The employee became insolvent and German insolvency proceedings were commenced.

Under German law notification of an assignment is not required to perfect the assignment, but under Luxembourg law it is. Accordingly, in this case if German law applied the assignment to the German bank would have had priority over the assignment to the Luxembourg bank but if Luxembourg law the priority position would have been reversed.

Which law therefore took precedence? The German court requested the ECJ give a preliminary ruling on the question.  Contrary to the commonly held view, the ECJ concluded that Article 14 of the Rome I Regulation did not assist and was therefore unable to provide for an answer to the question leaving the German court in a challenging situation particularly so, because the relevant rules for determining the conflict of law were actually deleted from German law in 2009.

So which law do the courts apply when determining whether there has been a valid cross-border assignment of receivables? Currently the answer depends on which country is being asked to consider the question:

(i)             It could be the law which is expressed to govern the contract from which the assigned receivable arises. This is the approach normally adopted in Germany.

(ii)            In England, the Netherlands and Spain it is in principle the law chosen by the assignor and the assignee to govern the contract under which the receivable is assigned;

(iii)           Whereas in the U.S., for example it is in principle the law of the jurisdiction in which the assignor is situated.

The position is far from clear meaning that an assignees of receivables cannot always be certain whether the assignment is valid and enforceable.

Hope for the future? -The proposed EU Assignment Regulation

Thankfully the European Union intends to introduce new legislation that will help clarify the position. The Assignment Regulation proposed in March 2018 is currently being discussed in the Council of the European Union. However it is likely to be subject to extensive negotiation before adoption.

The principles set out in Article 4 of the Assignment Regulation are that the law of the habitual residence of the assignor will apply (Article 4 (1)) unless:

the claim is cash credited to a bank account or claims arising from financial instruments, in which case the law governing the account or the financial instrument will apply (Article 4 (2)), or

there is a securitization, in which case the assignee and the assignor can chose the law applicable to the assignment (Article 4 (3)).

Once adopted (subject to a 18 month waiting period) the Assignment Regulation will be directly applicable. This means that whilst EU Member States do not need to implement it into their domestic laws the courts of the Member States are bound to apply it in respect of all assignments which are concluded on or after the date it comes into effect.

However, the Assignment Regulation will not apply in Denmark, it will only apply in Ireland if Ireland opts into the Assignment Regulation and will not apply to the UK since it is expected that the UK will no longer be a EU Member State at the time the regulation is adopted and becomes effective.

The Assignment Regulation does not allow parties to contract out of it or to agree the applicable law which shall regulate the assignment of claims.

Major impact on international trade finance

The Assignment Regulation is expressed to have Universal Application, which means that it will apply the law designated by the assignment, even if this is not the law of any Member State.

For example, if a US exporting company assigns an invoice or other claim arising from a contract governed by German law to an EU assignee, then US law will apply in determining whether the assignment was effective vis-à-vis third parties, and not German law.

Because of this rule the Assignment Regulation will have a major impact on international trade finance involving the assignment of receivables. It could also create uncertainty over which law is applicable if the relevant third country’s law does not recognize the rule contained in Article 4(1).

What is the effect of the Assignment Regulation on Bank Accounts?

Bank accounts and account pledges will continue to be governed by the law of the country where the relevant bank is situated, provided that the account mandate prescribes that the law of that country shall govern the banking relationship.

However, this will only apply to bank accounts held with banks where the head office is situated within the European Union and to branches of third country banks which are located within the European Union.

In respect of banks situated outside of the European Union Article 4 (1) applies and the relevant account security will be governed by the law of the country where the bank has its place of central administration. .

What is the effect of the Assignment Regulation on Financial Instruments?

The law that applies to Financial Instruments will be the law governing the instrument. Article 2 (i) of the Assignment Regulation defines “Financial Instrument” as the instruments specified as such in the MIFID II Directive (Section C of Annex I of Directive 2014/65/EU of 15 May 2014).

It is unclear how this will affect the German Schuldschein -Market, since Schuldscheine with a term of more than 397 days may not qualify as a Financial Instrument. This could mean that secondary trading in such Schuldscheine becomes quite complex since the assignment of the relevant Schuldscheine will not be governed by German law, but by the law of the jurisdiction where the previous holders of the Schuldscheine is situated – and this could be any number of jurisdictions

What is the effect of the Assignment Regulation on securitization?

Presently the Assignment Regulation provides that the assignor and the assignee of a receivable/claim may choose the law applicable to the assignment of the securitization. However, the European Parliament propose to delete this exemption. This is disappointing because the proposal made by the European Commission could make securitization much easier and less complex than is currently the case.

What is the position in respect of Factoring, Asset Based Lending and Invoice Discounting?

Article 4(1) will apply to all other forms of receivable finance such as factoring, asset based lending, invoice discounting or other forms of supply chain finance. Accordingly the law of the central place of administration of the assignor determines the effectiveness and perfection of the assignment vis-à-vis third parties.

In practice that rule will make the financing of portfolios of receivables (which could be subject to a multitude of jurisdictions) much easier, where they are owned by one assignor situated in one jurisdiction. In that case it will be much easier to identify the one relevant law applicable.

Conversely, it will make it more difficult to finance portfolios of those receivables where assignors are situated in various jurisdictions but the receivables themselves are governed by the same law.

How does the Assignment Regulation apply to cross-border assignments in insolvency?

The difficulty here, is that the relevant test for the purposes of Article 4(1) of the Assignment Regulation in determining the “habitual residence” of the assignor is the “ place of central administration ” whereas the test under the EU Insolvency Regulation is the “centre of main interests” (COMI) and the presumption that the COMI is the company’s registered office. There is no such assumption under the Assignment Regulation.

Applying either of those tests may result in the same answer but it cannot be excluded that the location of the assignor could be different in some circumstances, resulting in uncertainty as to which law might apply to cross-border assignments in insolvencies.

Further, unlike under the EU Insolvency Regulation where the definition of COMI requires the company to have held its centre of main interests for 3 months, the same does not apply under the Assignment Regulation. Therefore, it could make it difficult to identify the “place of central administration” if the assignor has recently changed location, and again, the ability to identify the relevant applicable law.

The principles set out in the Assignment Regulation are welcome because they provide much needed clarity on which law applies when determining the validity of an assignment of receivables cross-border. It will provide more certainty to assignees, and hopefully lead to less litigation as a consequence.

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Assignment of Receivables Agreement

Quebec English Civil law Unannotated

Contrat de cession de créance Contrat de cession de créance

D07200 - Quebec French Civil law Unannotated

Assignment of Receivables Agreement Assignment of Receivables Agreement

D07200a - Quebec English Civil law Unannotated

Grille d'analyse - Contrat de cession de... Grille d'analyse - Contrat de cession de créance

D07201 - Quebec French Civil law Unannotated

In order to be granted a loan, one must often provide security to guarantee repayment of the loan. When the borrower is also the creditor of another party, it may offer this debt-claim as security to obtain financing. This transaction is referred to as debt assignment. The debt-claim is assigned for an amount below its nominal value and the assignor guarantees its payment in principal, interest and fees. Our template sets out the legal framework for this type of financing arrangement.

0.00 INTERPRETATION 0.01 Terminology 0.01.01 Agreement 0.01.02 Breach 0.01.03 Change in Control 0.01.04 Confidential Information 0.01.05 Encumber or Encumbrance 0.01.06 Event of Default 0.01.07 Force Majeure 0.01.08 Fundamental Provisions 0.01.09 Law 0.01.10 Legal Representatives 0.01.11 PARTY 0.01.12 Person 0.01.13 Prime Rate 0.01.14 Receivables 0.02 Precedence 0.03 Jurisdiction 0.03.01 Governing Law 0.03.02 Non-compliance a) Severability b) Substitute Provision 0.04 Miscellaneous 0.04.01 Cumulative Rights 0.04.02 Time and Dates a) Time of the Essence b) Computation of Time c) Delays 0.04.03 Financial References 0.04.04 References within Agreement 0.04.05 Gender and Number 0.04.06 Headings 0.04.07 Presumptions 0.04.08 Knowledge 0.04.09 Approval 0.04.10 GAAP 1.00 PURPOSE 1.01 Assignment 1.02 Conditions 1.02.01 Required by ASSIGNOR 1.02.02 Required by ASSIGNEE 1.02.03 Choice 2.00 CONSIDERATION 3.00 TERMS OF PAYMENT 3.01 Base Amount 3.02 Interest 3.03 Loss of Term 4.00 SECURITY 4.01 In favour of ASSIGNOR 4.02 In favour of ASSIGNEE 5.00 MUTUAL REPRESENTATIONS AND WARRANTIES 5.01 Status 5.02 Authority 5.03 Binding Agreement 5.04 Canadian Resident 5.05 Commission 5.06 Insurance 5.07 Nominee 5.08 Fundamental Provisions 5.09 Disclosure 6.00 REPRESENTATIONS AND WARRANTIES OF ASSIGNOR 6.01 Status 6.02 Authority 6.03 Binding Agreement 6.04 Insurance 6.05 Nominee 6.06 Fundamental Provisions 6.07 Disclosure 6.08 Existence of the Receivables 6.09 Defect and Nullity 6.10 Prior Assignment 6.11 Sole Owner 6.12 Condition of the Debtor 7.00 REPRESENTATIONS AND WARRANTIES OF ASSIGNEE 7.01 Status 7.02 Authority 7.03 Binding Agreement 7.04 Insurance 7.05 Nominee 7.06 Fundamental Provisions 7.07 Disclosure 8.00 MUTUAL DUTIES AND OBLIGATIONS 8.01 Confidential Information 8.01.01 Undertaking 8.01.02 End of Agreement 8.02 Insurance 8.02.01 Insured Risks 8.02.02 Amount of Coverage 8.02.03 Issuer 8.02.04 Co-insured 8.02.05 No Limitation 8.03 Indemnification 8.03.01 “Loss” 8.03.02 Scope 8.03.03 Procedure 8.03.04 Deductible 8.03.05 Limitation on Claims 8.04 Disclosure of Agreement 9.00 DUTIES AND OBLIGATIONS OF THE ASSIGNOR 9.01 Guarantee 9.02 Execution of Documents 10.00 OBLIGATIONS OF ASSIGNEE 11.00 SPECIAL PROVISIONS 11.01 Assignment 11.01.01 Prohibition 11.01.02 Effect of Breach 11.01.03 Exception 11.02 Force Majeure 11.02.01 No Default 11.02.02 Duty 11.02.03 Rights of Other PARTY 11.03 Relationship 11.03.01 Independent Contractors 11.03.02 No Control over Performance 11.03.03 No Authority to Bind 11.04 Further Assurances 11.05 Other Remedies 11.05.01 Choices 11.05.02 No Limitations 11.06 Prescription 12.00 GENERAL PROVISIONS 12.01 Notice 12.02 Dispute Resolution 12.02.01 Good Faith Negotiations 12.02.02 Mediation 12.02.03 Arbitration 12.03 Election 12.04 Counterparts 12.05 Amendment 12.06 No Waiver of Rights 12.07 Electronic Transmission 12.08 Language 13.00 TERMINATION 13.01 Mutual Consent 13.02 Unilateral Termination 13.03 Without Notice 13.04 Prior Notice 13.05 Change of Control 14.00 EFFECTIVE DATE 14.01 Retroactivity 14.02 Execution 14.03 Deferral 15.00 DURATION 15.01 Instantaneous 15.02 Survival 16.00 SCOPE SCHEDULE A – EXCERPT FROM A RESOLUTION OF ASSIGNOR SCHEDULE B – EXCERPT FROM A RESOLUTION OF ASSIGNEE SCHEDULE C – ACCEPTANCE BY THE DEBTOR SCHEDULE D – ACCEPTANCE BY THE SURETY

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The Government restricts bans on assignment

United Kingdom |  Publication |  November 2018

Legislation now in force preventing parties from prohibiting the assignment of receivables under certain contracts.

At the moment, a contract can prohibit or restrict the parties’ ability to assign or transfer rights created under the contract. The extent of the restriction is a matter of interpretation of the clause concerned. If one of the parties to the contract attempts to assign the benefit of the contract in breach of the restriction, the purported assignment is ineffective.

One of the key assets of any business is its receivables, and restrictions on assignment can prevent the parties from factoring receivables or otherwise raising finance on them. The Government has decided that it should be easier for businesses to raise finance on their receivables. Accordingly the Small Business, Enterprise and Employment Act 2015 allows regulations to be made to invalidate restrictions on the assignment of receivables in particular types of contract. The regulations have now been made. They are contained in The Business Contract Terms (Assignment of Receivables) Regulations 2018. Draft regulations published in July, have been approved by both Houses of Parliament and are now in force.

What types of contracts do the Regulations apply to?

The Regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. But there are a number of important exclusions from their application, including the following:

• They only apply to contracts entered into on or after 31 December 2018.
• They only apply where the person who supplies the goods, services or intangible assets concerned, and is therefore entitled to the receivable, is a small or medium-sized enterprise which is not a special purpose vehicle. Whether or not an entity qualifies in any particular case requires a detailed examination of the precise wording of the
• Regulations. Counter-intuitively, the test is not applied at the time the contract is entered into, but at the time the assignment takes place.
• There is a specific exemption for contracts “for, or entered into in connection with, prescribed financial services”: These are widely defined to include “any service of a financial nature”.
• There are specific exclusions for particular types of contract, including certain commodities, project finance, energy, land, share purchase and business purchase contracts and operating leases.
• As a general rule, it would seem that the Regulations only apply to contracts governed by English law or the law of Northern Ireland, but they prevent the parties from choosing a foreign law if it can be established that the purpose of doing so was to evade the Regulations.
• The Regulations do not apply if none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom.

What is the effect of the Regulations?

The Regulations provide that “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.”

A receivable is the right to be paid any amount under a contract for the supply of goods, services, or intangible assets. The Regulations do not prevent the parties from restricting the assignment of other contract rights.

More difficult is to establish what is meant by assignment. Receivables are transferred in various ways in practice. Sometimes the transfer is outright (for instance by way of sale); and sometimes it is by way of security (for instance to secure a loan). The transfer may be effected by a statutory assignment, an equitable assignment, a charge or a trust. “Assignment” is not defined in the Regulations, and so there is some doubt as to which of these transactions are covered.

Although charges are not expressly referred to, they might be covered by the expression “assignment” if it is given a broad interpretation. But because of the uncertainty, the best course is to take an assignment by way of security over a receivable where there is, or might be, a restriction. That way, it is clear that the Regulations do apply.

Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition , or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it. Whether or not the Regulations apply in any particular case will require an analysis of the precise terms of the restriction.

The Regulations will be of particular importance to businesses involved in the financing of receivables. And they will also be of concern to buyers because they will override their contractual protections.

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UAE clarifies factoring and assignments of receivables

The recently enacted Federal Decree-Law No. 16 of 2021 on Factoring and Transfer of Civil Accounts Receivable (the New Law) which enters into force on 8 December 2021, being the first federal regulation in the United Arab Emirates (the UAE) dealing specifically with factoring and the assignment of receivables, has ushered in some much-needed clarity as to how these arrangements should work in the UAE. Specifically, the New Law provides a new regulatory framework which sets out the basic legal requirements for assignments and transfers of receivables, validity and perfection requirements, as well as the rules for determining priority amongst competing claims over assigned receivables.

Historically, this had been viewed as something of a 'grey' area of the law – governed in a piecemeal way, with Federal Law No. 5 of 1985 (as amended, the Civil Code) governing the assignment of debt and Federal Law No. 4 of 2020 (the Moveable Assets Mortgage Law) governing assignments over receivables which are taken by way of security. This had created some uncertainty as to which regulation should apply in particular circumstances, as well as uncertainty regarding the relationship between the different laws. The fact that the New Law seeks to provide a unified framework in relation to this area is a very welcome development. There are, however, certain key aspects of the New Law which may require further clarification as market participants seek to rely upon this new framework.

Scope of the New Law

The New Law applies broadly to any assignment of receivables made as part of commercial or civil transactions. Notable exclusions from this new law are assignments in the context of:

• personal / family transactions;
• financial contracts regulated by clearing agreements;
• foreign exchange transactions;
• interbank payment systems, net-based clearing systems and settlement related to securities, assets or other financial instruments;
• repurchase of securities, assets or financial instruments deposited with a broker;
• the right to financial payments fixed in endorsable bonds;
• the right to payments deposited in credit accounts with banks; and
• the right to payments under securities, documentary credits and letters of guarantee.

What is an Assignment?

The New Law governs " Assignments ", which is defined to cover an arrangement where " contractual rights to settle a cash sum owed by the Debtor are transferred to the Assignee, and the Assignment constitutes the agreement to create a security right on the Debtor's debt, transfer it as a security, and sell it in a final sale ". One possible interpretation of this particular definition would be that the New Law only governs arrangements which not only assign a debt but which also create a security interest over that debt. However, many factoring arrangements and debt assignments simply involve a debt being assigned absolutely and do not necessarily involve a security right being created over that debt. The New Law also does not elaborate on the different types of factoring arrangements that can exist, such as the purchase or sale of receivables, discounting and reverse factoring.

Given that the New Law appears (on the face of it) to be intended to cover all factoring arrangements and assignments of debts, the prudent course of action for market participants would be to ensure that all of their factoring arrangements and assignments of debt comply with the New Law, regardless of whether those arrangements involve security being created.

Form of Assignment

When it comes to the form that an assignment of receivables should take, the New Law is not prescriptive, and simply provides that an assignment shall be considered effective provided that the receivables that are subject to the assignment are described in a general or specific manner in order to allow for their identification.

Importantly, the New Law goes on to clarify some of the key points around how to describe the receivables being assigned (in relation to which there previously was some uncertainty). Specifically, we highlight the following:

• It is acceptable for the purposes of the New Law to describe the assigned receivables generally, for example by simply saying that the assignment is of all receivables that are currently owed by a debtor, all receivables that will be owed by a debtor in the future, or a specific class or specific or general type of such receivables.
• The New Law therefore appears to confirm that, in an assignment agreement, it is not necessary to individually list out each particular contract under which a debt is assigned.
• The New Law confirms that if the subject of the relevant assignment is receivables which are owed by a debtor in the future, then that assignment may be effective without the need to enter into any new transaction to assign each future debt in due course.

Effectiveness and Priority

One key point which the New Law clarifies is in relation to the effectiveness of debt assignment agreements against third parties: with specific provisions of the Moveable Assets Mortgage Law being incorporated by reference in order to establish that such assignments, in order to be effective towards third parties, must be declared on the electronic register created under the Moveable Assets Mortgage Law (which is currently operated by the Emirates Integrated Registries Company (EIRC)). While, prior to the introduction of the New Law, it was common for market participants to register assignments of receivables with the EIRC, it was not previously clear whether this was strictly necessary with respect to absolute assignments of receivables under the Civil Code which did not create security interests.

Regarding any specific requirements which need to be met in order for an assignment of receivables to be effective against a debtor (which have traditionally been governed by the Civil Code and relevant cases), the New Law does not specifically repeal or replace the Civil Code in this respect, and so the prudent course would be for market participants to continue to satisfy the applicable conditions derived from the Civil Code. This essentially means that, in order for an assignment of receivables to be enforceable against a debtor, notice of the assignment is required to be provided to the relevant debtor and (depending on the exact circumstances) with it also being advisable for the assignment of receivables to be acknowledged by the relevant debtor. The New Law does however give an assignee the clear right to send a notification and payment instructions to the relevant debtor in relation to receivables that have been assigned to that assignee (even if that notification gives rise to a breach of the underlying contract as between the assignor and the debtor), and does also seem to indicate that the debtor must agree to the assignment particularly in the context where the underlying contract is being amended.

Similar to what we see with registration, when it comes to determining priority among competing claims over receivables, the New Law relies on the Moveable Assets Mortgage Law to allocate the priority (determined by the date and time of registration) of the rights of assignees over the accounts receivable, to determine the priority of the assignor's obligation and to determine the priority of the assignment towards non-contractual rights.

To conclude, the New Law has clarified certain key issues regarding the assignment of receivables, and in doing so has created a more unified framework. It is now clear that any receivables which are subject to an assignment (which may include future receivables) need only be described in the assignment in general terms, and it is also now clear that certain elements of the Moveable Assets Mortgage Law apply to assignments of receivables (such as the registration requirements and rules regarding priority). Question marks do, however, remain over how the New Law treats certain types of debt assignments and factoring arrangements (particularly ones that involve absolute assignments and not security rights), as well as the question of how a court would interpret the relevant provisions of the Civil Code in light of the New Law.

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• Implementing Receivables Credit to Cash

How Event-Based Revenue Management Works

Receivables automates the timing of revenue recognition for both manually entered transactions and transactions imported using AutoInvoice. This automated revenue management process helps you to comply with the strict revenue recognition requirements mandated by US GAAP and International Accounting Standards.

The event-based revenue management process evaluates each transaction and decides whether to immediately recognize revenue, or temporarily defer revenue to an unearned revenue account based on the contingencies assigned to the transaction. Revenue is subsequently recognized according to the removal event assigned to each contingency.

Settings That Affect Event-Based Revenue Management

These settings affect event-based revenue management:

Require salesperson Receivables system option: You must enable the Require salesperson system option to use revenue recognition.

AR_INTERFACE_CONTS_ALL table: You can use the AR_INTERFACE_CONTS_ALL table to assign revenue contingency IDs to billing lines, before importing transactions using AutoInvoice.

Revenue Contingencies: The revenue contingencies assigned to transactions, and their corresponding removal events, determine what revenue is deferred and for how long.

Revenue Policy: Your revenue policy may trigger the assignment of contingencies to transactions.

Revenue Contingency Assignment Rules: Your active revenue contingency assignment rules may trigger the assignment of contingencies to transactions.

Revenue Scheduling Rules: If a revenue scheduling rule is assigned to the transaction, then revenue is recognized according to the revenue scheduling rule details and rule start date.

How Event-Based Revenue Management Is Calculated

The event-based revenue management process for deferring and later recognizing revenue on transactions follows these steps:

Receivables evaluates a transaction either entered manually or imported using AutoInvoice for revenue recognition.

If one or more contingencies exist, Receivables defers the corresponding revenue to an unearned revenue account and records the reason for the deferral.

Receivables monitors the contingencies until an event occurs that can remove the contingency and trigger revenue recognition.

When a removal event occurs, Receivables recognizes the appropriate amount of unearned revenue on the transaction.

The revenue is recognized either according to the revenue scheduling rule or the last contingency removal date.

Related Topics

• Guidelines for Defining Revenue Policies
• Guidelines for Receivables System Option Settings