undisclosed assignment of receivables

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Assignment of Accounts Receivable: Meaning, Considerations

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Investopedia / Jiaqi Zhou

What Is Assignment of Accounts Receivable?

Assignment of accounts receivable is a lending agreement whereby the borrower assigns accounts receivable to the lending institution. In exchange for this assignment of accounts receivable, the borrower receives a loan for a percentage, which could be as high as 100%, of the accounts receivable.

The borrower pays interest, a service charge on the loan, and the assigned receivables serve as collateral. If the borrower fails to repay the loan, the agreement allows the lender to collect the assigned receivables.

Key Takeaways

• Assignment of accounts receivable is a method of debt financing whereby the lender takes over the borrowing company's receivables.
• This form of alternative financing is often seen as less desirable, as it can be quite costly to the borrower, with APRs as high as 100% annualized.
• Usually, new and rapidly growing firms or those that cannot find traditional financing elsewhere will seek this method.
• Accounts receivable are considered to be liquid assets.
• If a borrower doesn't repay their loan, the assignment of accounts agreement protects the lender.

Understanding Assignment of Accounts Receivable

With an assignment of accounts receivable, the borrower retains ownership of the assigned receivables and therefore retains the risk that some accounts receivable will not be repaid. In this case, the lending institution may demand payment directly from the borrower. This arrangement is called an "assignment of accounts receivable with recourse." Assignment of accounts receivable should not be confused with pledging or with accounts receivable financing .

An assignment of accounts receivable has been typically more expensive than other forms of borrowing. Often, companies that use it are unable to obtain less costly options. Sometimes it is used by companies that are growing rapidly or otherwise have too little cash on hand to fund their operations.

New startups in Fintech, like C2FO, are addressing this segment of the supply chain finance by creating marketplaces for account receivables. Liduidx is another Fintech company providing solutions through digitization of this process and connecting funding providers.

Financiers may be willing to structure accounts receivable financing agreements in different ways with various potential provisions.​

Special Considerations

Accounts receivable (AR, or simply "receivables") refer to a firm's outstanding balances of invoices billed to customers that haven't been paid yet. Accounts receivables are reported on a company’s balance sheet as an asset, usually a current asset with invoice payments due within one year.

Accounts receivable are considered to be a relatively liquid asset . As such, these funds due are of potential value for lenders and financiers. Some companies may see their accounts receivable as a burden since they are expected to be paid but require collections and cannot be converted to cash immediately. As such, accounts receivable assignment may be attractive to certain firms.

The process of assignment of accounts receivable, along with other forms of financing, is often known as factoring, and the companies that focus on it may be called factoring companies. Factoring companies will usually focus substantially on the business of accounts receivable financing, but factoring, in general, a product of any financier.

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Receivables Finance And The Assignment Of Receivables

Tfg 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 legislation

Invoice  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:

• has no effect;
• has no effect in relation to persons of a prescribed description;
• has effect in relation to persons of a prescribed description only for such purposes as may be prescribed.”

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 Regulations

As 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 Law

1 | 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

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Trade 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.

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Assignment of Accounts Receivable – Trap for the Unwary

By  Steven A. Jacobson

Most businesses are familiar with the mechanics of an assignment of accounts receivable. A party seeking capital assigns its accounts receivable to a financing or factoring company that advances that party a stipulated percentage of the face amount of the receivables.

The factoring company, in turn, sends a notice of assignment of accounts receivable to the party obligated to pay the factoring company’s assignee, i.e. the account debtor. While fairly straightforward, this three-party arrangement has one potential trap for account debtors.

Most account debtors know that once they receive a notice of assignment of accounts receivable, they are obligated to commence payments to the factoring company. Continued payments to the assignee do not relieve the account debtor from its obligation to pay the factoring company.

It is not uncommon for a notice of assignment of accounts receivable to contain seemingly innocuous and boilerplate language along the following lines:

Please make the proper notations on your ledger and acknowledge this letter and that invoices are not subject to any claims or defenses you may have against the assignee.

Typically, the notice of assignment of accounts receivable is directed to an accounting department and is signed, acknowledged and returned to the factoring company without consideration of the waiver of defenses languages.

Even though a party may have a valid defense to payment to its assignee, it still must pay the face amount of the receivable to the factoring company if it has signed a waiver. In many cases, this will result in a party paying twice – once to the factoring company and once to have, for example, shoddy workmanship repaired or defective goods replaced. Despite the harsh result caused by an oftentimes inadvertent waiver agreement, the Uniform Commercial Code validates these provisions with limited exceptions. Accordingly, some procedures should be put in place to require a review of any notice of assignment of accounts receivable to make sure that an account debtor preserves its rights and defenses.

• Announcement

Newsletter No. 149 (EN)

Securing and assigning claims in hong kong.

• February 20, 2015

I. Introduction

Security in the form of a charge over certain assets, such as receivables or “book debt” for instance, is of signifi­cant importance for international trade and loan transactions. In order for a creditor to minimize the risk of default by the debtor and obtain assurance that only secured rather than unsecured debts are held, the creditor must take several steps to reserve a preferential rank over other creditors.

This newsletter will discuss the assign­ment of receivables, in German called “Zession”, and what is required for a registration in Hong Kong to reserve a preferential rank in case of insolvency of the debtor. First, the relevant terms will be defined and then described in further detail in context of Hong Kong legisla­tion. The final part of the newsletter will explain what is required to register a blanket assignment of receivables in Hong Kong.

II. Definitions

1.       Assignment of receivables

Assignments of receivables are regulated in Germany in § 398 of the Civil Law Code ( B ürgerliche G esetz b uch, BGB ). The assignment of receivables is a common security for loans. The legal re­lationship usually consists of a party granting security, the grantor (e.g. per­son or entity taking a loan) who assigns receivables (e.g. receivables for goods supplied) to a secured party (e.g. entity or person giving a loan). The assignment of receivables makes the se­cured party the creditor of the receiva­bles.

2.      Types of assignment of receivables

Assignments generally can be distin­guished into single assignment (“Einzel­zession”), overall assignment (“Mantel­zession”) and blanket assignment (“Globalzession”). The blanket assign­ment is also sometimes re­ferred to as global assignment. The blanket assign­ment is differentiated from the single as­signment and overall assign­ment insofar, as the blanket assign­ment assigns all cur­rent and future receivables in favour of the secured person or entity. In contrast, a single assign­ment only assigns a specif­ic receivable while an overall assignment usually assigns only receivables that ex­isted at a certain point in time. Some­times, overall assignments are accompa­nied with an arrangement that all future receivables will be assigned through ad­ditional overall assignments. However, since such arrangement is very similar to the blanket assignment, usually in such circumstances the parties agree to pro­ceed with a blanket assignment.

3.      Absolute and undisclosed assign­ments

Independent of whether current or fu­ture receivables are assigned, or whether one specific receivable or a group of re­ceivables are assigned, the assign­ment can be either absolute or undisclosed. With an undisclosed assign­ment the se­cured party decides not to disclose the assign­ment to the third-party debtor, who continues to settle the receivables by payment to the grantor. With an absolute assignment, the assign­ment is disclosed to the third-party debtor and the debtor is only able to set­tle the receivables with discharging ef­fect by payment to the secured party, not the grantor.

In Hong Kong, no requirement exists that for an absolute assignment the third-party debtor has to only settle the receivables with discharging effect by payment to the secured party. It is how­ever common, if the secured party is a bank, that a special account is opened, which is used by the third-party debtor to settle the receivables. The money held in these accounts can only be accessed or transferred with the permission of the secured party (usually the bank).

III. Assignment of receivables in Hong Kong

Assignments of receivables such as the blanket assignment are generally possi­ble and are regulated under the broader term “charges”. In Hong Kong and many other common law jurisdictions a distinction is made between “fixed” and “floating” charges.

A fixed charge is a charge over assets which are specified (e.g. a machine or a specific receivable). With the effect of the assignment that the grantor (“char­gor”) is no longer free to deal with those assets. In contrast, a floating charge is an assignment of a type or group of assets (e.g. inventory, goods in a warehouse, undefined number of receivables, or the general under­taking or property of the company) which are not specifically identifiable and the chargor is able to continue to use the assets (processing and selling goods, collect receivables, etc.) while the secured person (“chargee”) retains certain rights in case of insolvency.

Charges are generally available to sole-traders as security instrument in business transactions while in practice “floating charges“ are primarily only granted by companies. The C ompanies O rdinance Chap. 622 ( CO ) does not define fixed and floating charges and so its definition is based on case law in alignment with common law principles. Assignments of receivables have generally been catego­rised as fixed charges. However, the conditions of what constitutes a fixed charge have changed significantly after the decisions in Agnew v IRC [2001] UKPC 28 and National Westminster Bank Ltd v Spectrum Plus Ltd [2004] 3 WLR 503.

A blanket assignment has the character­istic that the underlying assets, the re­ceiv­ables, constantly change (old receiv­ables are settled, and new ones are add­ed). Therefore, it is generally accept­ed that the blanket assignment is not treat­ed like a fixed charge, but as a float­ing charge. The classification is not up to the involved parties, but is determined by the relevant judge on a case by case basis (common law).

In case the grantor would like to classify the blanket assignment as a fixed charge, it would be necessary to open a bank ac­count, which is used for all settlement payments of the relevant receivables, and the grantor is unable to access or transfer any amounts from this account without the prior permission of the se­cured party. Since such arrangement is rather unpractical, it can be noted that the blanket assignment will most likely be characterised as a floating charge. With a floating charge, the secured party has only access to the charged receiva­bles, when they “concretise”. A floating charge will concretises if:

• the company winds-up;
• commences insolvency proceedings;
• ceases its business;
• any agreed terms of the charge.

The disadvantage of a floating charge is that the secured party is ranked after creditors that are in the possession of a fixed charge.

IV. Registration

To ensure that a party providing a loan becomes a secured creditor in compari­son to an unsecured creditor, it is neces­sary that the charge is valid and regis­tered. If an assignment of receiv­ables is not registered, it is invalid towards the liquidator and other creditors of the company. The registration of charges is regulated in Section 333 ff of the CO.

1.       Registration

Section 334 of the CO includes a list of charges that must be registered (inde­pendent whether they are considered fixed or floating charges). Among the listed charges are receivables.

2.      Registration period

Section 335 of the CO requires that a charge is registered within a month af­ter its creation.

3.      Registry keeping

Pursuant to Section 352 of the CO, a company must keep a registry at its reg­istered office. In case that the registry is not kept at the registered office, the Registrar of Companies must be in­formed. The registry must be kept in Hong Kong.

4.      Registration by the company or its creditors

In theory it is the duty of the company to register the charge. However, it is common that the registration is done by the creditor.

A blanket assignment of receivables is possible in Hong Kong and must be registered at the Companies Registry as charge. A registration is also possible (recommended) by the creditor. A blan­ket assignment of receivables is most likely categorised as a floating charge, which has the disadvantage that in case of insolvency, the secured party’s set­tlement of claims will be ranked after the creditors of fixed charges.

We hope that we have been able to assist you with this information. If you have any further questions, please contact us:

Lorenz & Partners Co., Ltd.

27th Floor, Bangkok City Tower, 179, S Sathorn Rd,

Thung Maha Mek, Sathon, Bangkok 10120

Email:  [email protected] www.lorenz-partners.com +66 (0) 2 287 1882

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Assignment of Receivables – The Achilles’ Heel of Invoice Financing

Receivables are a key tool in trade finance particularly with the use of invoice financing. By transferring the rights to a receivable such as an invoice, SMEs are able to get much needed working capital, getting paid by funders today, what is owed by their buyers in the future. Whether done on a recourse or non-recourse basis, assignments of the receivables are a central feature of invoice finance structures as they give funders critical rights against buyer-debtors. But without sufficient care on how assignments are obtained, this simple document can be the Achilles’ heel of an invoice financing program.

Risks in Invoice Financing

Invoice financing transforms a supplier-buyer relationship into a multi-faceted, funder-buyer as well as funder-supplier dynamic. The risks to be considered include:

• Receivable title risk: the risk that the supplier may have already assigned or pledged the receivable to another funder;
• Receivable transfer risk: the risk that applicable law may not allow the funder to take good title to the receivable, or otherwise subordinate the lender’s rights to third party claims;
• Dispute risk: the risk that the buyer may claim the supplier failed to deliver goods in accordance with the contract;
• Discount or dilution risk: the risk that the buyer will not pay the full amount of the invoice for reasons other than the supplier’s performance of the contract e.g., relying on set-off rights or discounting mechanisms in umbrella arrangements unknown to the funder;
• Payment delay risk: the risk that the buyer will not pay on time;
• Payment direction risk: the risk that the buyer will make the payment to the supplier or some other party instead of the funder; and
• Debtor credit risk: the risk that the buyer-debtor does not pay at all.

Assignments – why are they important.

A robust invoice financing program using assignments should narrow the risks above but only if careful attention is paid to how they are done. When assigning an invoice, a notice of the assignment serves both legal and practical functions. Legally, a notice of assignment is one of the requirements to create a legal assignment, which in turn allows the assignee-funder to enforce rights in its own name. Without notice, the assignment is treated as an equitable assignment which may provide challenges for a funder to enforce rights through an uncooperative supplier. Practically, a notice also serves to “flush out” some common excuses a buyer may deploy for non-payment relating to setting-off sums from other transactions, side arrangements on discounting or disputes relating to the invoice itself.

With no visibility on whether receivables had been previously assigned, a notice of an assignment serves as an important basic risk mitigant towards double financing. In addition, in cases of multiple assignments done by the supplier, a notice serves to give priority to a funder against subsequent funders – this can make all the difference if multiple financing of the same invoice is discovered later.

Forged/ Multiple Assignments

A notice of assignment as acknowledged by the buyer is only half the battle. In a pursuit for liquidity, unscrupulous traders may fabricate contracts, invoices and by extension assignment acknowledgements. These illegitimate acts may sometimes never come to light as a supplier may be able to recycle liquidity in time to repay its funders. But other times, forged acknowledgments or multiple financing are only discovered when the funder seeks to enforce against the buyer, who may be located in a difficult jurisdiction to get effective legal recourse. In the process, startling discoveries can be made:

• The buyer alleges the contract, invoice and acknowledgment of assignments have been forged;
• The buyer alleges that goods were never received notwithstanding invoicing and acknowledgment of the assignment of the invoice;
• The buyer is directed by the supplier to pay the supplier directly or a third party notwithstanding the assignment notice;
• The buyer convinces the supplier that the assignment has been extinguished; or
• The same invoice has been assigned to multiple funders.

The Achilles’ heel with assignments in invoice financing programs is that there is little interface between the funder and the buyer – the supplier plays a central role in routing documents to its funder. Funders have little visibility or capacity to verify every document and even where verification is done, an unscrupulous supplier may still impersonate their buyers with fictitious email accounts. The difficulty in detecting invoice fraud cannot be overstated and will continue to challenge the trade finance market. The Association of Banks in Singapore have introduced a Code of Best Practices for commodities financing which includes recommendations to get some reference of an assigned invoice into the invoice document itself and for lenders to obtain acknowledgment of assignments directly from the buyer. But without a registry for invoices, it would be difficult for funders to eradicate multiple assignments of the same receivable. Singapore is making plans to change that – so do watch this space.

Assignments as security or as outright transfer – why does it matter?

A receivable can be assigned as security for performance of a supplier’s obligation to repay a loan. Alternatively, an assigned receivable can operate as an outright transfer to a funder. The distinction is critical as understanding which party has ownership in the receivable can have important accounting (e.g., off balance sheet treatment) and legal consequences (e.g., the right to sue under the invoice). The distinction is even more acute if the supplier goes into liquidation – if deemed a security, a receivable would be treated as part of the insolvent supplier’s assets and if the supplier fails to register its assignment as a charge, then it may be void against the liquidator with the consequence that the funder is left unsecured for its debt. Receivables Purchase Agreements, in trying to have the best of both worlds to protect the funder for every loss and contingency can often inadvertently run the risk of being reclassified as a loan rather than a “true sale”.

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• Security Interests

United Nations Convention on the Assignment of Receivables in International Trade (New York, 2001)

Date of adoption: 12 December 2001

The purpose of the Convention is to promote the movement of goods and services across national borders by facilitating increased access to lower-cost credit.

Why is it relevant?

The transactions covered by the Convention (e.g. asset-based lending, factoring, forfaiting, securitization, project financing) are fundamental for the financing of international trade. Yet uncertainty as to the content and choice of legal regime applicable to the assignment of receivables constitutes an obstacle to international trade. As a result, an assignment of future receivables or a bulk assignment of receivables that are not identified individually may be ineffective. In addition, an assignment that is effective according to the law under which it was concluded, may not be enforceable as against the debtor in another country or be subordinated to the rights of competing claimants in another country. Moreover, the law applicable to conflicts of priority among competing claimants may be difficult to determine. This means that either credit is not available on the basis of receivables (e.g. the claim for the payment of the purchase price in a contract for the sale of goods) or credit is available but only to those that may be able to afford its cost; and lack of sufficient access to credit or high cost of credit is a disadvantage in particular for small- and medium-size enterprises.

Key provisions

The Convention removes legal obstacles to receivables financing transactions, inter alia, by: (a) validating assignments of future receivables and bulk assignments, and by partially invalidating contractual limitations to the assignment of receivables); (b) enhancing certainty with respect to a number of issues, such as the effectiveness of an assignment as between the assignor and the assignee and as against the debtor; (c) clarifying the law applicable to key issues, such as the priority between competing claims; and (d) providing a substantive law regime governing priority between competing claims that States may adopt on an optional basis.

Relation to private international law and existing domestic law

The Convention applies only to international assignments of receivables and to the assignment of international receivables (with the exception of "financial" receivables). However, the Convention may affect a domestic assignment of a domestic receivable if: (a) it is in conflict with an international assignment of the same receivable; or (b) if it is one in a series of subsequent assignments, one of which, falls within the scope of the Convention. For the debtor, related provisions of the Convention to apply, at the time of the conclusion of the contract from which the assigned receivables arise, the debtor has to be located in a Contracting State or the law governing the assigned receivables has to be the law of a Contracting State.

Additional information

The Convention contains an optional part with applicable law rules and another optional part with substantive rules dealing with the third-party effectiveness and priority of an assignment of receivables.

The Convention is accompanied by an explanatory note. There is also an-article-by-article commentary on the draft Convention that was before the Commission at its 34 th session in 2001.

Additional Resources

• Text - Explanatory note
• UNCITRAL Legislative Guide on Secured Transactions: Supplement on Security Rights in Intellectual Property (2010)
• UNCITRAL Legislative Guide on Secured Transactions (2007)
• United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980)
• General Assembly resolution 56/81

Travaux préparatoires

• Endorsement by American Bar Association (ABA)
• Endorsement by International Chamber of Commerce (ICC)
• Endorsement by International Factors Group (IFG)
• A/48/17(SUPP)
• A/CN.9/378/Add.3
• A/49/17(SUPP)
• A/50/17(SUPP)
• A/51/17(SUPP)
• A/52/17(SUPP)
• A/53/17(SUPP)
• A/54/17(SUPP)
• A/55/17(SUPP)
• A/CN.9/472/Add.1
• A/CN.9/472/Add.2
• A/CN.9/472/Add.3
• A/CN.9/472/Add.4
• A/CN.9/472/Add.5
• A/CN.9/489/Add.1
• A/CN.9/490/Add.1
• A/CN.9/490/Add.2
• A/CN.9/490/Add.3
• A/CN.9/490/Add.4
• A.CN.9/490/Add.5
• A/CN.9/491/Add.1
• A/CN.9/WG.II/WP.87
• A/CN.9/WG.II/WP.89
• A/CN.9/WG.II/WP.93
• A/CN.9/WG.II/WP.96
• A/CN.9/WG.II/WP.98
• A/CN.9/WG.II/WP.102
• A/CN.9/WG.II/WP.104
• A/CN.9/WG.II/WP.105
• A/CN.9/WG.II/WP.106

• Receivables
• Notes Receivable
• Credit Terms
• Cash Discount on Sales
• Accounting for Bad Debts
• Bad Debts Direct Write-off Method
• Bad Debts Allowance Method
• Bad Debts as % of Sales
• Bad Debts as % of Receivables
• Recovery of Bad Debts
• Accounts Receivable Aging
• Assignment of Accounts Receivable
• Factoring of Accounts Receivable

Assignment of accounts receivable is an agreement in which a business assigns its accounts receivable to a financing company in return for a loan. It is a way to finance cash flows for a business that otherwise finds it difficult to secure a loan, because the assigned receivables serve as collateral for the loan received.

By assignment of accounts receivable, the lender i.e. the financing company has the right to collect the receivables if the borrowing company i.e. actual owner of the receivables, fails to repay the loan in time. The financing company also receives finance charges / interest and service charges.

It is important to note that the receivables are not actually sold under an assignment agreement. If the ownership of the receivables is actually transferred, the agreement would be for sale / factoring of accounts receivable . Usually, the borrowing company would itself collect the assigned receivables and remit the loan amount as per agreement. It is only when the borrower fails to pay as per agreement, that the lender gets a right to collect the assigned receivables on its own.

The assignment of accounts receivable may be general or specific. A general assignment of accounts receivable entitles the lender to proceed to collect any accounts receivable of the borrowing company whereas in case of specific assignment of accounts receivable, the lender is only entitled to collect the accounts receivable specifically assigned to the lender.

The following example shows how to record transactions related to assignment of accounts receivable via journal entries:

On March 1, 20X6, Company A borrowed $50,000 from a bank and signed a 12% one month note payable. The bank charged 1% initial fee. Company A assigned $73,000 of its accounts receivable to the bank as a security. During March 20X6, the company collected $70,000 of the assigned accounts receivable and paid the principle and interest on note payable to the bank on April 1. $3,000 of the sales were returned by the customers.

Record the necessary journal entries by Company A.

Journal Entries on March 1

Initial fee = 0.01 × 50,000 = 500

Cash received = 50,000 – 500 = 49,500

The accounts receivable don't actually change ownership. But they may be to transferred to another account as shown the following journal entry. The impact on the balance sheet is only related to presentation, so this journal entry may not actually be passed. Usually, the fact that accounts receivable have been assigned, is stated in the notes to the financial statements.

Journal Entries on April 1

Interest expense = 50,000 × 12%/12 = 500

by Irfanullah Jan, ACCA and last modified on Oct 29, 2020

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International Factoring In China Part II: assignment of receivables

• China Outbound Investment

YOU MAY DOWNLOAD THE PDF VERSION OF THIS POST HERE:  china-factoring-law-assignment-of-account-receivables .

Assignment of receivables is the core of factoring business. An accurate and clear understanding of Chinese laws in respect of assignment of receivable is vital and paramount for engaging in factoring business in China.

As you may have noticed in the Part I post “ overview of legal regimes for factoring industry “, the legal framework governing assignment of receivables is mainly laid out in China Contract Law.

I.  Receivables That Can be Assigned

Article 79 (Assignment of Rights; Exceptions) of China Contract Law reads:

The creditor may assign its rights under a contract in whole or in part to a third person, except where such assignment is prohibited: (i) in light of the nature of the contract; (ii) by agreement between the parties; (iii) by law.

It shall be noted (1) the creditor rights under contracts as prescribed in the quoted article encompass not only financial or monetary account receivables in factoring business but also claim rights of non-pecuniary nature; (2) as a general rule, account receivables in factoring business falling within the three prohibition circumstances shall not be assigned by the creditors. There is an exception under Chinese laws with respect to the account receivables that are prohibited from assignment in the original/underlying contract, and this point will be dealt with later in this post.

Future Receivables

What has caused controversy is the question whether the “creditor’s rights” as prescribed in that Article 79 include “future receivables”.

From a conservative point view, the rights assignable under Article 79 do not cover future receivables for the reason that one cannot assign a right he or she does not have at the time of assignment or transfer. As you can see from rules on commercial factoring promulgated by local governments in China, only the rules in Shanghai Free Trade Zone explicitly cover future receivables. However we notice that judicial practice may be more liberal towards future receivables perceiving and apprehending that future receivables factoring accounts for a big portion of whole industry, for example, in Tianjin High People’s Court’s first opinions on factoring, it explicitly mentioned future receivables in one of its provisions indicating validity of assignment of future receivables, an clear echo of the international attitude towards valid factoring of future receivables.

II. Assignment of Receivables and Notice of Assignment

While people talk about assignment of receivables, it seems that there is different understanding of “assignment of receivables” as to whether it is a true sale or not. I stumbled onto an article titled “ The Difference Between Assignment of Receivables & Factoring of Receivables ” which explained that in Texas of USA, assignment of receivables means to collateralize the receivables instead of selling them.

Assignment of Receivables is a True Sale

But in China both legislation and judicial practice have made it clear that assignment of receivables is true sale. There is not much argument on whether factoring of receivables is a true sale or not, regardless of whether financing is provided or not.  Latest judicial interpretation from China Supreme Court on application of laws in sale and purchase contract disputes includes the assignment of creditor’s rights within its ambit (but without clear reference to “factoring” in that interpretation), and therefore relevant rules regarding sale and purchase contract can apply to assignment of receivables.

So it is certain under Chinese laws that once assignment of receivables is effected, then the title in the receivables passes to the assignee or the buyer.

Notice of Assignment

Article 80 of China Contract Law reads:

Article 80  Where the obligee assigns its rights, it shall notify the obligor. Such assignment is not binding upon the obligor if notice is not given. A notice of assignment of rights given by the obligee may not be revoked, except with the consent of the assignee.

So according to this article 80, to assign a receivable, the creditor shall notify the debtor of the assignment. Otherwise, this assignment is not binding on the debtor. In other words, failing a property notice to debtor, the assignee cannot request the debtor to pay money to him or her. Notice is a must and shall have to be dealt with seriously.

(1) pursuant to this article 80, only the creditor shall have the right to notify the debtor of the assignment. While this may seem weird to factors, it is real and clear. However in order to accommodate factoring practice, Tianjin High People’s Court has been bold enough to provide in its guidelines that factoring companies may serve notice of assignment on the debtor if it is so stipulated in the factoring contract with the client/supplier, whereby the factoring companies shall prove the fact of assignment of receivables and its identity of being a factoring company. It shall be born in mind that Tianjin High People’s Court’s guidelines may only be upheld by lower courts in Tianjin, and won’t be followed by courts outside Tianjin area.

(2) what should be written in the notice? First of all, it shall be made crystal clear that the notice is to inform the debtor of  the assignment of certain receivables to the assignee. A mistake that factors may make is to simply tell the debtor to pay the money into a different bank account without disclosing the fact that the receivables are being assigned. Secondly, since the assignment of receivables is considered as a sale under Chinese laws, the receivable being sold shall be identified clearly in the notice of assignment such as reference to parties, amounts, contract number and etc. A challenge in this regard is related to identifying future receivables given the reluctance of Chinese courts to recognize assignment of future receivables. The notice shall try to be specific about parameters for identifying future receivables.

(3) how should the notice be served on the debtor? In order to make the assignment effective, the notice served shall have to be actually received by the debtor and the burden of proof on actual receipt shall rest on the shoulder of the assignor and the factor. The best bet is to have the debtor acknowledge in writing the receipt of the notice of assignment as in the case of three-party (client, factor and customer) factoring agreement.

Assignment of Receivables without Notice

In factoring world, there are basically two cases in which assignment of receivables is not notified to the debtor.

(1) the so-called “non-notification factoring” where, as per request of its client, notice of assignment of receivables is not served on the debtor except in circumstances stipulated in the factoring contract. In undisclosed factoring, the debtor shall still pay off the receivables directly to the assignor of the receivables or the client of the factoring company.

(2) in international two-factor factoring, it is often the case that the assignment of receivables from the exporter to the export factor is not notified to the foreign debtor/buyer, and then the export factor in turn assigns the same receivables to the import factor which assignment is duly notified to the debtor, so to the debtor, the receivables are assigned to the import factor only without knowledge of the assignment from the supplier/exporter to the export factor.

One has to wonder what difference it makes when the assignment is not duly notified? What is exactly assigned when notice of assignment is not made to debtor?

In civil law system, a creditor right is understood as a right to request the counterpart to perform or refrain from performing certain acts. Logically and naturally, if one assigns his creditor right against his debtor, the assignment shall entitle the assignee to make the same request to the counterpart. Otherwise, it does not seem to be an assignment of complete creditor right. In the case of assignment of receivables without notice, the assignee has no right to request the debtor to pay the money to him, so one can validly hold that the assignee has not acquired the full title of the creditor right at all. In turn, when the assignee (say export factor) has not acquired the creditor right, it certainly cannot sub-assign the same creditor right (receivables) to sub-assignee (the import factor).

Nonetheless, we noticed that a recent case judgement (the dispute is about L/C) entered by China Supreme Court, when addressing the legal effect of transferring bill of lading from shipper to a bank, expounded on its understanding of Article 80 of China Contract Law that the handover of bill of lading (representing a creditor’s right to request delivery of goods) without notice to carrier is still a valid assignment of creditor’s right only that the assignee cannot prevail against third party in actual possession of the goods.

It is my opinion that an effective assignment of any creditor right must be accompanied with a proper notice of assignment to the debtor in the absence of a registration system. In the case of non-notification factoring, the factoring contract for the assignment of receivables is still valid as between the assignor and assignee but what is actually assigned or transferred is the future money proceeds of the receivables but not the receivables/creditor right itself. So at present under Chinese laws, each assignment and sub-assignment shall be made with proper notice of assignment to the debtor, and otherwise challenge may be raised against assignee as to its title in the acquired receivables.

III. Right of Priority in case of  Multiple Assignments of Same Receivables

Proper notice of assignment can give rise to effective assignment of receivables under Chinese laws. What if there are more than one notice of assignment (to different assignees) sent to the debtor? Among the completing claimants, who will have the priority over others? This fraudulent multiple assignments of the same receivables are always happening in factoring business in the world, it must be addressed.

There is no clear provision on this in any statutory laws in China. While China has set up a registration for pledging of receivables, has been in operation for years, China has not set up a registration system for assignment of receivables. In fact, back in 2012, a Shanghai intermediary court made it clear that the registration of assignment of receivables on the central bank’s online system does not mean anything in the absence of clear laws conferring the intended effects thereon. In the said case, the bank thought that the registration of the assignment of receivable on the online system could substitute notification of assignment to debtor, but apparently the court didn’t agree.

Again, Tianjin High People’s Court in its local guidelines conferred on the online registration system the legal effect that the assignee who doesn’t check out the receivable’s status by logging into the online system would not be considered as bona fide assignee and therefore cannot claim priority over prior assignee that has done the registration of its assignment. As noted above, the guidelines are only effective with local courts in Tianjin City.

Without a law-prescribed registration system, the other options are to base priority on either the order of conclusion of assignment contracts or the order of notices of assignment. However either way, it is not conscionable to leave the other party in grievance.

Given the provision of Article 80 of China Contract Law, it is very likely that Chinese courts will give priority to the assignee who has informed the debtor of the assignment of receivables in the first place. In case none of the assignees having made the notification, then the assignee that signs the assignment contract in the first place will be given priority.

It is suggested by Model Factoring Law and I concur, that an online registration system with proper statutory endorsement as to its effect shall be employed to tackle the priority issue in multiple assignment of the same receivables.

It is worth a note that some lawyers in factoring industry have proposed that the priority shall be based on whoever receives the invoices evidencing the receivables, arguing that (1) receivables assigned are like personal properties capable of being delivered to the assignee and thus ownership or title in the such receivables passes thereby, (2) then the invoices represents receivables, (3) so the delivery of invoices shall mean the passing of ownership, (4) accordingly the assignee that acquires the invoices in the first place shall have the priority over other assignees who don’t have.

However, I disagree with the arguments. Account receivables are no personal properties being capable to physical delivery, and commercial invoices cannot be considered as representing receivables  and such invoices can be made in as many copies as possible, and if the invoices mentioned refers to China’s tax fapiaos, then the fapiao is an evidence of receipt of payments under Chinese laws, contrary to the alleged function of representing a valid receivables.

That is why none of those international laws have ever referred to such a way to decide on priority in relation to assignment of receivables.

IV. Contractual Restriction on Assignment of Receivables

Another major concern in factoring business is the validity of assignment of receivable under a contract which prohibits the assignment of contractual right in its own clauses.

Unfortunately, China Contract Law makes it clear in Article 79 that a creditor’s right cannot be assigned if so prohibited in the contract from which the right arises. This provision of the Contract Law has been considered as compulsory breach of which can lead to voidness of the assignment.

However to alleviate the rigidity of the restriction to accommodate the development of factoring industry in China, courts may be ready to find the assignment of such restricted receivables valid and effective so long as the factor is bona fide at the time of conclusion of the assignment contract.

Again, Tianjin High People’s Court has made this explicit in its guidelines to the same effect as described in the preceding paragraph. The guidelines have gone further to also provide that the factor may claim damages for losses incurred due to the assignor violating the contractual restriction on the assignment.

In the meantime, it shall be noted that the assignor in breach of the contractual restriction may also be sued by the debtor.

Hi My name is Geoff wright I need a good lawyer in Shenzhen china, I was duped by a supplier, and plan to sue the company and 6 other websites all owned by same guy. also for lost revenue, so around 30 k please refer me or take the case if your interested, Thanks so much for the info in the blog, geoff wright 760 631 9670

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Related posts.

Commercial factoring business in China Free Trade Zone to take off

International factoring in china part i: overview of legal regimes for factoring industry, fci general rules for international factoring.

Undisclosed Factoring

Undisclosed factoring, also referred to as non-notification factoring, is specific in that the customer is not notified about the receivables being pre-financed by the factoring company.

In this form of factoring financing, there is not the usual requirement for customers notification about the assignment of the receivables to the factoring company and for customers consent with the assignment.

Undisclosed factoring is based on various legal and organizational procedures. One of the advantages is that the bank account to which the customer makes payments is, in formal terms, an account of the client, not an account of the factoring company.

Given the above, undisclosed factoring is a good option for customers who do not allow factoring or where it is not, for business reasons, advisable to inform the customer about the client using the services of a factoring company.

On the other hand, this form of factoring financing is only feasible for receivables from sufficiently strong and creditworthy customers, such as chain retailers or multi-national companies or in the automobile industry. Additionally, undisclosed factoring requires superior creditworthiness of the supplier – client of the factoring company.

Focus on: SECURITISATIONS IN THE NETHERLANDS

Fiz advocaten b.v..

The Netherlands have a traditionally strong residential mortgage loan securitisation market. The total amount outstanding of Dutch securitisations in 2020 was EUR 40.6 billion. In total EUR 5.9 billion of securitisations was sold to investors in 2020 via Dutch special purpose vehicles: EUR 2.8 billion are residential mortgages, EUR 1.4 billion buy-to-let mortgages and EUR 1.6 billion other securitisations. The total amount outstanding of securitisations of buy-tolet mortgages has doubled to EUR 3.3 billion in 2020. This reflects the growth of the private rental market and the interest of international investors in the Dutch housing market.

A securitisation transaction’s funding can be structured in several ways. The Special Purpose Vehicle (SPV) needs funding to purchase the receivables or assets, either through debt, equity or a combination of both, with the issuance of notes being the mostly used. The SPV issues (different tranches of) notes to mainly professional investors. The SPV will receive the notes’ face value, which the SPV then uses to purchase the receivables, thereby fulfilling its obligations (principal and interest payments) as laid down in the note documentation.

An original lender is the party which – directly or indirectly – concluded the original securitisation agreement. In general, this original lender will be the contractual counterparty and the loan obligors’ point of contact. Before the transfer to the SPV, the loans’ obligations are owed to the lender of record.

The originator is either the entity that was ‘involved’ in the original agreement or the entity that purchases a third party’s exposure (most likely the original lender’s) on its own account and then securitises them. The definition of originator is therefore broader than that of an original lender.

The SPV is set up for the acquirement of a portfolio of assets, obtaining financing for their acquisition and enter into agreements for this financing and acquisition. To ensure that the SPV’s assets aren`t seen as assets of the originator, the SPV is a stand-alone company without connections to the originator’s group. Most Dutch SPV’s are set up as a private limited liability company. To establish its independence, a licensed trust company – pursuant to the Dutch Trust Companies Act – will be appointed as the SPV’s director. The SPV is made bankruptcy remote by different measures to mitigate this risk.

The sponsor is either a credit institution or an investment firm other than the originator. As such, the sponsor establishes and manages a securitisation that purchases exposures from third-party entities. The sponsor can also – after establishing a securitisation that purchases exposures from third-party entities – delegates the day-to-day active portfolio management to an entity authorised to do so.

The servicer fulfils all kind of administration and payment collection services, such as collecting principal and interest payments from loan obligors, distributing payments and administrating the loan portfolio. Often, the original lender is appointed as servicer, but it can also be done by a third party specialised in servicing. The services often include primary, special and master servicing.

The investors in a securitisation transaction are the noteholders in case of a note issue or, in the case of a fund structure, the participants. The investors carry the asset pool’s risk (but not the risk retention part) and are often (institutional) financial institutions.

The security agent preserves the rights of investors and acts as their representative. Typically, a Dutch foundation acts as a security agent. Such a foundation has limited purpose, is set up as bankruptcy remote entity and often managed by an independent trust company licenced under the Dutch Trust Companies Supervision Act.

In securitisation transactions, a collection foundation – often managed by the servicer – can be appointed. Under Dutch law this is often a foundation, tasked with performing all payment collection and disbursements services through separate accounts, so the transaction’s cash flows can be easily distinguished from the servicer’s cash flows.

And finally, other parties which can be involved in a transaction include among others calculation agents, swap counterparties, liquidity providers or asset managers.

While a great variety of assets can be securitized, the vast majority of financial transactions involve the financing of residential, commercial or buy-to-let mortgage loans. But assets can also include among others corporate loans, acquisition finance, car loans or credit cards. Assets can be distinguished by their type but also by their quality. And while most assets are performing, there is a market for securitisations of non-performing loans (NPL’s).

4. Transfer of loans

A securitisation’s key object is to separate the portfolio of receivables from the originator’s assets and transfer them to the SPV. The most commonly used method is through a true sale. After the transfer the SPV will be the receivables’ beneficiary and it’s entitled to all cash flows coming from those receivables. In a true sale transaction, the transfer’s validity should be certain (no clawback provision) so future repayment claims due to an invalid transfer can be avoided.

This asset separation and legal transfer is usually realised through assignment. The assigned asset pool serves as a security for the investors for the investment’s repayment, making the assignment the central legal figure in a securitisation.

Dutch law distinguishes transfers of receivables resulting from loans by way of assignment (article 3:94 of the Dutch Civil Code; DCC) and those by way of contract transfer (article 6:159 DCC). In other words, on the one hand one sees transactions where the originator wants to part from the client leading to a new lender of record; on the other hand, there are transactions where the originator realises the receivables’ value resulting from the loan but remains the lender of record.

4.1 Assignment

Under Dutch law, assignments are either disclosed or undisclosed. In case of transfer through disclosed assignment, the receivables are transferred by notifying the loan obligors of the transfer. If the assignment is undisclosed the SPV becomes entitled to the receivables. There’s no notification requirement towards the loan obligors, but the undisclosed deed of assignment must be included in a notarial deed or registered at the Dutch tax authorities. Transactions including consumer receivables are often done by undisclosed assignment for commercial reasons and – except in certain (default) events – no notification will be given. As long as that is the case, payments under the receivables are made to the original lender (lender of record). The consequence of assignment is that the lender of record and the beneficiary of the receivables are no longer the same person.

Transfers only aimed at providing security are void because of a lack of valid title on the basis of article 3:84(3) DCC. The general opinion is that as long as parties intend to accomplish a true sale of the receivables and the SPV receives full title to them – and not just a security interest – the transfer will be valid.

Another important aspect for Dutch securitisation transactions is to be certain that there are no contractual transfer prohibitions. If they do exist, the transfer’s validity depends on the contract’s wording. If they imply proprietary effect, the assignment becomes invalid.

4.2 Transfer of Contract

Contract-based transfers transfer the loans with all associated rights and obligations to the SPV which will subsequently be the lender of record; in case of assignment the transferor stays the lender of record and the transferee only obtains the receivables, including the (ancillary) rights and obligations attached to them (articles 6:142 and 6:144 DCC).

A transfer of contract can only happen with the loan obligors` cooperation. Since there`s no guarantee one will get all loan obligors` commitment to cooperate in advance, it`s common practice that the relevant receivables are also assigned by disclosed assignment as a safety precaution.

4.3 Merger and Demerger

Next to transfers of contract, parties can choose for a merger and demerger. The transferor engages in a demerger, creating a separate, demerged entity, containing the contracts and portfolio that will be transferred; assets not be transferred remain in the original entity. The new demerged entity will then immediately merge with the transferee (for example the SPV) or the transferee will immediately purchase the shares. And while neither the loan obligors` consent nor their notification is required, demergers must be announced and creditors may object to them.

4.4 Ancillary Rights

Rights attached to the receivables that are key for their exercise and collection and that determine their substance and existence (e.g. granting final discharge and making repayment arrangements) accrue to the party entitled to the receivables; they are therefore transferred to the assignee as an ancillary right upon assignment of the receivable.

In general, loan obligors shouldn`t become aware of the assignment and the lender of record is not concerned – apart from realising the loans – with completely severing customer relations. By transferring the loan’s receivables through undisclosed assignment, the acquiring party (the SPV) becomes entitled to them, while no notification is required. However this has the consequence that the lender of record and the receivables` beneficiary are no longer the same persons.

Making the distinction between those rights and obligations that are transferred to the acquiring party and those which remain with the lender of record is not always clear-cut. But experience shows that investors are particularly interested in the receivables` return and less keen on unforeseen costs during the lifetime of his/ her investment.

The lender of record on the other hand must protect the loan obligors` interests on the basis of its own (contractual/legal) duty of care. Therefore the lender of record wants to avoid the situation where, on the one hand, it has a duty of care towards the loan obligors, while on the other hand the investor doesn`t want to cooperate, because this is usually at the expense of his/ her (prognosticated) return. See also Supreme Court 10 July 2020, ECLI:NL:HR:2020:1276; Promontoria-case in paragraph 7.13.

5.1 Security Rights

In a securitisation the SPV becomes entitled to the receivables and also requires the benefit of any security rights to secure those receivables. If they are transferred, accessory and ancillary rights (such as security rights) follow the receivables by operation of law with the exception of a purely personal right. Therefore, the SPV will have in principle the benefit of the security granted for the receivables. Additional security rights, e.g. a right of pledge on the disbursement account receivables, can be provided in a security transaction to the security trustee on behalf of multiple investors.

Under Dutch law a parallel debt (a separate and independent debt obligation) is created between the SPV and the security agent. This debt is equal to and linked to the SPV’s debt to the investors. This parallel debt of the security agent is secured by the security rights. The security agent must act in accordance with the transaction documents in relation to the enforcement of security rights and the distribution of payments in accordance with the payment’s listed included priority.

In general the SPV provides comprehensive security rights to the security agent under the parallel debt, for example an undisclosed first ranking right of pledge on receivables, bank accounts and any rights under the transaction documents.

5.2 Bank Mortgage

Bank mortgages are frequently included in Dutch loans with a bank as lender. Often, they exceed the provided loan and cover all payable amounts that might exist between the borrower and the bank. In case of assignment of a receivable secured by a bank mortgage, it’s uncertain whether the rights of the bank mortgage follow the receivable. Bank mortgages – being a specific type of security – don`t automatically follow the receivable but depend on the parties` intention. The bank mortgage right might be partially transferred and held by both the SPV and the original lender. Under Dutch law this constitutes a joint estate on which the Dutch rules pertaining to joint estates should be taken into account.

6 Regulatory aspects

6.1 securitisation regulation.

In the European Union securitisations are regulated by the Securitisation Regulation (2017/2402/EU). They can be regarded as fully European when its originator, sponsor and SPV are established in the EU. If that`s the case and they meet the criteria of ‘simplicity, standardisation and transparency’, securitisations can be qualified as STS-securitisations. This STS-label ensures preferential capital treatment for banks and certain investment firms.

6.2 Offering of Credit

Article 2:60 of the Financial Supervision Act (FSA) forbids to offer (mortgage and consumer) credit without a Netherlands Authority for the Financial Markets (AFM) licence. This ‘offer of credit’ is a broad concept. For example, it includes the option of having a proposal to acquire a professional business to “act as counterparty” in a consumer contract; it also includes managing and administering such a contract in the pursuit of a professional practice or business. This broad definition means that a party holding or obtaining the receivables under a credit agreement qualifies as credit provider who must have – in principle – a licence. But if a credit manager handles the receivables after the transfer, the Exemptions Regulation comes into play, defining this person as a (licensed) credit provider or credit intermediary. Often, the lender of record is the credit manager, but he/ she could also be a third party servicer.

6.3 Credit Intermediation

Article 2:80(1) FSA prohibits to intermediate in credit without an AFM licence. This prohibition goes a long way, since it includes all commercial activities for ‘concluding’, amongst others, loan agreements between consumers and providers. In principle, servicers in securitisations or other whole loan sale transactions must act within the scope and licence requirement for credit intermediation.

6.4 Ban on commission

Article 4:25a(2) FSA and article 86c of the Market Conduct Supervision Financial Institutions Decree ban commissions in respect of mortgage loans. This means consumers must pay the servicer (as credit intermediary) directly. Since 2020 – as a consequence of the amended the Exemption Regulation – credit managers are exempted from this ban on commission.

6.5 Single-track Interest Rate Policy

Based on the single track interest rate policy-rule, a consumer mortgage loans provider must apply the same interest rate for the same fixed-interest period to new and existing loan obligors with similar risk profiles. The consumer’s risk profile depends primarily on the loan to value (LTV), loan to income (LTI), and whether the National Mortgage Guarantee covers the mortgage. On the other hand, regional differences are allowed to exist and discount campaigns are possible. The lender of record is therefore not allowed to apply different interest rates to loan obligors based on the underlying investors.

6.6 Credit granting

If the underlying assets of the securitisations are mortgages, the Mortgage Credit Directive (MCD; 2014/17/EC) applies. The Consumer Credit Directive (CCD; 2008/48/EC) comes into play if the underlying assets are consumer loans. In these cases, it should be noted that if the receivables of consumer loans or the loan contract are transferred, the consumer needs to be informed. That doesn`t mean that this is a constitutive requirement for transfers. And if the original lender continues to manage the credit on behalf of the SPV this notification is not required at all: the original lender remains the consumer’s point of contact.

Data protection rules are relevant in respect to securitisations. Following the assignment of the receivables, the SPV would in principle receive personal data of loan obligors, consequently qualifying as data controller under de General Data Protection Regulation (2016/579/EU; GDPR). As such, the SPV would have to comply with the GDPR obligations, including the requirement to provide information to the data subjects (the loan obligors) in accordance with article 14 GDPR. This notification is at odds with the principle of the undisclosed assignment, whereby the loan obligors aren`t informed of the assignment. To ensure compliance with data protection rules, securitisation transactions often have arrangements in which the SPV receives data tapes without any personal data, circumventing the controller qualification. The loan obligors’ personal data will either by placed in escrow or be encrypted. In the latter case, a trustee holds the data key which can only be released in connection with defaults or enforcement of the portfolio.

If a collection foundation is used in a securitization transaction, the question can arise if this foundation provides payment services and requires a license under the revised Payment Services Directive (2015/2366/EU; PSD2). The general assumption though is that this is not the case if the collection foundation is explicitly designated as the payment address and the loan obligors pay liberating to the collection foundation.

If the SPV finances the purchase of the receivables with capital raised through the issuance of units (participations rights) instead of notes, it can qualify as an alternative investment fund, regulated by the Alternative Investment Fund Manager Directive (2011/61/EU; AIFMD). That means that – in principle – the fund manager requires a licence. However, for the SPV the fund manager might be exempted for securitisation SPV’s based on article 2(3)(g) AIFMD, if the securitisation meets the set definition. Small scale securitisation – meaning the AUM do not succeed EUR 100 million or EUR 500 million and are unleveraged and closed-end for the first five years – could use of the AIFMD light regime of article 2:66a FSA, if certain conditions are met.

6.10 Prospectus

The Prospectus Regulation (2017/1129/EU) pertains to securitisations that are funded by the issuance of notes as well as to those funded by issuing units (participation rights), provided these qualify as securities. For the issuing of notes and participation rights, a prospectus drawn up in accordance with the Prospectus Regulation is required as well as the AFM`s approval. However, an exception applies if the securities are offered to less than 150 persons, or only to professional investors or when they have a EUR 100,000 countervalue. These exceptions don`t apply if the securities are to be listed on a regulated market.

6.11 MiFID II

Following article 3 of the Securitisation Regulation, sellers of securitisation positions (meaning exposures to a securitisation) can only sell those positions to retail clients if a suitability test has been passed. This test must follow the rules of the revised Markets in Financial Instruments Directive (2014/65/EU; MiFID II)

The European Market Infrastructure Regulation (648/2012/EU; EMIR) contains multiple obligations for parties in an over-the-counter (OTC) derivate contract. Financial counterparties are subject to a clearing obligation through an authorised central counterparty for all eligible OTC derivative contracts. However, a Dutch SPV qualifies as a non-financial counterparty as long as it is not licensed as, for example, an alternative investment fund. If the SPV is a group company with its total gross notional value of the non-hedging OTC derivative exceeding the thresholds, the SPV could nevertheless be subject to the clearing threshold. If the SPV is exposed to the clearing obligation, it would also be required to post margin while different risk mitigation obligations apply as well.

6.13 Case-law Duty of Care

The Promontoria-case (Supreme Court 10 July 2020, ECLI:NL:HR:2020:1276) evolved around the question whether in case of assignment of loan receivables by a bank to a non-bank, the non-bank as assignee has a specific duty of care towards the borrower; and if so, how does that duty of care relate to the public law rules applicable to a bank and the bank’s duty of care? The Supreme Court ruled that the duty of care attached to the legal relationship isn`t part of the assigned receivable and doesn`t accrue to the assignee. However, the non-bank may have its own duty of care, obliging it to handle the borrower the same way as can be expected of a reasonably acting bank.

6.14 Credit Rating

The assets in a securitisation can be subject to credit ratings if parties desire such a rating. Rating the assets leads to obligations deriving from the Credit Rating Agencies Regulation (1060/2009/EC).

6.15 Brexit

Since 1 January 2021 the United Kingdom has its own securitisation regulation next to the EU Securitisation Regulation. While similar, these regimes aren`t identical. So for securitisations including both UK and EU parties, it’s necessary to check compliance with both regulations. For assessing the scope of the securitisation, the scope of both the Securitisation Regulation and the UK securitisation framework need to be taken into account.

7 Developments

7.1 capital market recovery package.

The Capital Market Recovery Package aims to amend certain rules in the EU capital market to support the post-Corona economic recovery. The package also amends the Securitization Regulation (EU 2021/557), including amendment of the retention requirements for NPLsecuritisations. In the case of NPL-securitisations the servicer can also be the retainer, if they can demonstrate their expertise and control systems to service these exposures. Apart from the amendments deriving from the Capital Market Recovery Package, the securitisation framework is subject to a comprehensive review, scheduled for 2022.

7.2 Sustainable Securitisations

On top of the European Commission’s regulations and directives regarding sustainable finance that have already been introduced, more have been announced. And these will also have their impact on the securitisation market. The Capital Market Recovery Package amendments state that by 1 November 2021, the EBA will publish a report on developing a sustainable securitisation framework. In this framework sustainability transparency requirements are integrated in relation to the Sustainable Finance Reporting Directive (2019/2088/EU; SFDR) and the Taxonomy Regulation (2020/852/EU). Also, from 1 June 2021 originators in securitisations may publish information about the main negative impacts on sustainability factors of the assets of the underlying exposures assets. And finally, the introduced proposal for an EU green bond standard (COM(2021)391) could also apply to originators of securitisations which are funded through note issues.

7.3 Tokenisation

A final interesting development is the rise in popularity of cryptocurrency, stable coins and other blockchain based ‘securities’. This phenomenon, described as tokenization, can also impact the securitisation market – in fact, there are already examples of financial institutions using tokens in their transactions.

Tokens are digital securities, stored in an online ledger with strong encryption which could have benefits when compared to more traditional securities.

Unless they qualify for example as ‘units’ as defined in the AIFMD, tokens and cryptocurrency themselves are not yet regulated, but a proposal has been submitted to establish an European framework for markets in crypto assets (COM(2020)593; MiCA). Funding a securitisation through an initial coin offering might well be the future, but not without properly assessing the regulatory framework in advance.

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Princess Kate’s Cancer: A Timeline of the Last Few Months

After months of speculation about her whereabouts, Catherine, Princess of Wales, announced that she is being treated for an undisclosed type of cancer.

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By Derrick Bryson Taylor

Reporting from London

For months, nearly all eyes have been fixated on the ebbs and flows of the British royal family, with King Charles III and Catherine, the Princess of Wales, in the spotlight because of health matters.

But the extended absence of Kate from the public eye and her slow re-emergence propelled a tidal wave of rumors over her whereabouts,. On Friday, she revealed in a video message that she has been diagnosed with cancer and is receiving chemotherapy.

Here is a quick timeline to help you catch up.

Dec. 25, 2023

Kate attends her last public event for a while.

Kate’s last official public appearance was on Christmas Day, when she attended a church service at St. Mary Magdalene Church in Sandringham, Norfolk, England.

She was photographed wearing head-to-toe royal blue while walking to the church alongside her husband, Prince William, and their three children, Prince George, Princess Charlotte and Prince Louis, as they routinely do each Christmas. The entire family coordinated in blue and green.

Jan. 17, 2024

Kate undergoes surgery.

A little more than three weeks later, on Jan. 17, Kensington Palace announced that Kate had been admitted to the London Clinic to have abdominal surgery . Officials gave few details about her health but said the surgery was successful, and that her condition was “not cancerous.” She was expected to remain hospitalized for up to two weeks.

Hours later, Buckingham Palace announced that King Charles III would be treated for an enlarged prostate.

Jan. 18, 2024

William visits Kate at the London Clinic.

The next day, William was photographed driving himself away from the hospital, where Kate was recovering from abdominal surgery.

Jan. 29, 2024

Kate is released from the hospital.

Almost two weeks later, Kate returned home to Windsor, just outside London . Kensington Palace officials said that she would convalesce at home for two to three months and would not resume her public duties until after Easter, at the end of March.

Unlike her father-in-law, King Charles III, who was photographed exiting the London Clinic after his procedure, there were no photographs of Kate leaving the clinic.

Feb. 5, 2024

King Charles is diagnosed with cancer.

Buckingham Palace officials announced in early February, just days after Charles had undergone treatment for an enlarged prostate, that the king had been diagnosed with cancer .

The palace did not share what form of cancer Charles has, but a palace official said it was not prostate cancer. Doctors had discovered the cancer during the earlier procedure.

March 4, 2024

Kate is spotted for the first time in months.

The public’s incessant thirst for information about Kate’s whereabouts and recovery reached a fever pitch in the first week of March. And around that time, TMZ published a grainy paparazzi shot of Kate riding in a car driven by her mother.

It was the first time Kate had been seen since her hospitalization. Despite the photograph circulating on the internet, British newspapers and broadcasters did not republish it, citing Kate’s request for privacy during her convalescence — though they did report on the sighting.

March 10, 2024

Kate and her children appear in a Mother’s Day photograph.

To mark Mother’s Day in Britain, nearly two months after her abdominal surgery, Kensington Palace released an official photograph of a smiling Kate surrounded by her three children, George, Charlotte and Louis. The palace did not give many details about the picture except that it was taken by William last week in Windsor, where the family lives in Adelaide Cottage, on the grounds of Windsor Castle.

While the picture was meant to highlight a happy family on the holiday and quell rumors, it became a subject of intense scrutiny after The Associated Press, and several other photo agencies, issued a “kill order,” asking its clients to remove it from all platforms over concerns that it had been manipulated. The New York Times, which had initially used the picture in a story, also removed it.

March 11, 2024

Kate apologizes for the altered family photo.

Kate took the blame and apologized for the Mother’s Day photo fiasco.

“Like many amateur photographers, I do occasionally experiment with editing,” she said on social media. “I wanted to express my apologies for any confusion the family photograph we shared yesterday caused.”

Kate is known as a photography enthusiast, and the palace often distributes her photos of the family. Palace officials stressed that Kate made minor adjustments for what was intended to be an informal family picture that was taken by William.

March 11 and March 18, 2024

Kate is spotted twice more.

Hours after Kate apologized for the photo edit, she was photographed alongside William leaving Windsor Castle.

The grainy photo that was widely published across the internet, showed Kate gazing away from the camera out of the window.

The next week, the couple was spotted again. This time in an unauthenticated video, walking outside a food shop near their home in Windsor. The video, captured by an onlooker, showed the couple carrying bags and wearing comfortable, dark clothing, blending into the crowd.

March 18, 2024

Another royal photo is flagged.

Getty Images placed an editorial advisory on a second royal family photo, this time an image of Queen Elizabeth II, flanked by her grandchildren and great-grandchildren. The photo — taken by Kate at Balmoral Castle in Scotland in August 2022 and released in 2023 on what would have been the queen’s 97th birthday — had been “digitally enhanced” before it was released by the palace, the photo agency said.

March 22, 2024

Kate reveals her diagnosis.

In a pre-recorded video broadcast on the BBC, Kate said she had been diagnosed with cancer and had begun chemotherapy. She described the past two months as “incredibly tough for our entire family.”

Like the king, the 42-year-old princess did not specify the type of cancer, but she asked the public and media to respect her desire for privacy, describing her illness as “a huge shock.”

She also asked for “time, space and privacy while I complete my treatment.” She said that she and William had needed time to explain everything to their children and “reassure them that I am going to be OK.”

Derrick Bryson Taylor is a general assignment reporter. He previously worked at The New York Post’s PageSix.com and Essence magazine. More about Derrick Bryson Taylor