Under what terms I am/I and my partner are still allowed to offset after an assignment?
According to the provisions of the New Civil Code: Art. 1582 – Effects of the assignment executed between the assignee and the assigned debtor (…) (3) When the assignment has become enforceable to them by acceptance, the assigned debtor may no longer enforce against the assignee the setoff they could claim in the relations with the assignor. Art. 1623 – Assignment of, or mortgage on an account receivable (1) The debtor that simply accepts the assignment or mortgaging of an account receivable consented to by their creditor to a third party may no longer enforce against the said third party the setoff they could claim against the initial creditor before acceptance. (2) An assignment or mortgage not accepted by the debtor, but which has become enforceable against them, only prevents the offsetting of the debts of the initial creditor that are dated later than the time when such assignment or mortgage became enforceable against them. It needs though to be noted that there are certain laws which put in place mechanisms similar to offsetting (Law no. 125/2011 approving the Government Emergency Ordinance no. 121/2010 amending and supplementing the Government Emergency Ordinance no. 146/2002 on formation and utilization of the resources ran through the State Treasury, and amending art. 52 of Law no. 500/2002 on the public finance): Art. 61 (…) (2) The amount to be assigned is paid by public institutions into the account indicated by the assignee, opened with the State Treasury only when the economic operator has not liabilities to pay to the State budget, the State social security budget, and the budgets of the special funds. (…) (4) When the tax certificate lists any liabilities payable to the State budget, the public institutions will give notice to the economic operator and the assignee of the amount of such liabilities. (5). In not more than 10 business days of such notice, however not later than 20 December, the economic operator may submit a new tax certificate to the public institution showing that the latter no longer has any liabilities to the State budget, the State social security budget, and the budgets of the special funds. (6) At the expiry of the term set out at para. (5), the public institutions have the following duties:
- a) to transfer into the account of the economic operator provided at art. 5 para. (1) the amount of the budget liabilities written in the tax certificate;
- b) to transfer onto the account of the assignee opened with the State Treasury the difference between the assigned amount and the amount set out at letter a).
In this case, no setoff per se occurs, but an indirect payment is made, however to the same effect: there is a risk that a part of the account acquired (the equivalent of your debts to the central State budget and the local budgets) is no longer collected directly by the Factor, further to occurrence of a right of recourse against you.
How the Account Receivable Assignment may be affected in an Inventory Mortgage Factoring Agreement
According to art. 2393 para. 2 of the Civil Code, the mortgage established on an inventory of goods is displaced on the price obtained from the sale of those goods or the goods obtained in lieu of the disposed goods (in case of an exchange). This means that the relevant account receivable assigned in favour of the Factor (by factoring) shall be affected in the event that the first Creditor commences force execution on the inventories of goods; if these inventories are no longer available, then the amounts of money representing the consideration for the goods on inventory will be executed. Art. 2392 – Scope of the mortgage on goods (1) The mortgage covers the proceeds and products of the mortgaged movable goods, as well as on all the goods received by the mortgagor further to an administration or disposal instrument executed in respect of the relevant mortgaged movable goods. (2) Any good that replaces, or the amount of which is passed to it shall be also deemed a product of mortgaged movable goods. Art. 2393*) – Disposal of the mortgaged good (1) The acquirer of a good in the ordinary course of the business of an enterprise that disposes of goods of the same kind acquires the good free of any mortgages established by the disposer, even when the mortgage is perfect, and the acquirer has knowledge of its existence. (2) In this case, the mortgage is moved on the price or other goods resulted from the disposal of the mortgaged good. What we should consider however is the fact that the Seller (Assignor/Adherent) collected part of the consideration (the amount paid by the Factor), and its claim is partially brought to an end with this amount paid by the Factor, with only a difference left to be pursued by the first Creditor, meaning the mortgage on the inventories is moved only to that part of the consideration not collected and the amount paid by the Mortgagor, being the goods of the Mortgagor to which this amount is transferred.
What happens when the assigned debtor receives the third party's attachment from the tax authorities?
Pursuant to the provisions of the Government Emergency Ordinance no. 92/2003 on the Code of Tax Procedure, when a taxpayer fails its tax liabilities on the due dates thereof, the tax bodies may proceed to forced execution against them, including by laying an attachment on the amounts due to them to third parties. Thus, the taxpayer’s debtors, being any person that owes them money under legal relations existing at the time of the attachment, become third attached parties liable to pay the amounts owed to the taxpayer to the tax body until the claim in respect of which the forced execution procedure was commenced. When, prior to the attachment, the debtors of the taxpayer are given notice of the fact that their debts to the tax payer are covered by a factoring agreement, these are under the obligation to inform the tax bodies that they have no debs to the respective taxpayer, and after the notice of factoring, their creditor shall become the factor that extended the factoring facility to the taxpayer. Consequently, the attachment notice issued and served after the assignment notice, shall neither affect nor block or suspend the payment liability of the assigned debtor to the factor, and the payments need to continue to be made according to the instructions written in the assignment notice as to the factoring operations. *the above apply only to factoring operations, and not to any discounting or working capital facilities based on a pledge on the cash receivables (receivable assignment) under the which the assignment stands for a guarantee, and not a transfer (sale) instrument.
How is a pledge on receivables different from a receivable assignment under a factoring-type facility?
The pledge on receivables is a real right on movable goods (claims) pledged to secure an obligation (repayment of the loan contracted, together with the related costs). A pledge on receivables is used to secure, at the same rank, the principal (loan), interests, fees, penalties and reasonable expenses incurred with the recovery and conservation of the asset thus pledged. Art. 2400 – Notice to the mortgaged receivable debtor (1) The mortgagee may only claim payment after having given notice to the debtor of the existence of such mortgage, the mortgaged receivable, the amount due and the means of payment. (2) Acceptance of the mortgage by the mortgaged receivable debtor under a written instrument has the same effects. Art. 2465 – Mortgage on receivables (1) A mortgage on an account receivable entitles the creditor, when the conditions for commencement of forced execution are met, the right to take-over the debt instrument, to demand and obtain payment or, at their discretion, to sell the account receivable and appropriate the price, all of these up to the secured amount. (2) As to the sale reference is made to at para. (1), the provisions regarding the claim assignment apply accordingly. For the Bank to be able to demand and obtain payment of the mortgaged receivable by the Debtor (payment is made by the Debtor to the Bank and not to the Mortgagor), one of the following two formalities must be duly executed in writing: i) giving notice to the Debtor of the following elements (cumulatively): a) the existence of the pledge lodged in favour of the Bank, b) the mortgaged receivable – identification/articulation/indication in the notice of the account receivable covered by the mortgage agreement, c) the amount owed – the proceeds the Debtor would pay to the Bank and not to the Mortgagor and which the Bank seeks to obtain from realization of the guarantee; this amount may not be in excess of the secured amount, d) the place and means of payment, or ii) acceptance of the mortgage by the mortgage receivable Debtor. In practice, for commercial (for instance, to ensure the activity in the accounts of the borrower opened with the Bank) and legal (different interpretations and the lack of caselaw under the New Civil Code) reasons, the notice shall be given to the Debtor before the Bank proceeds to forced execution of the guarantee (the loan is not overdue and not recovered). It can be construed that such a plain notice is in fact an “information” of the Debtor about the existence of the pledge on the receivables in favour of the Bank, and a request made to it to make the payments in the manner described in the text of such notice; for forced execution, a new notice shall be given. Thus, unlike the pledge on receivables, which is driven by the intention to provide the creditor with a guarantee for payment of a debt the mortgagor has to such creditor, the account receivable assignment is executed with a view to transferring an account receivable from the assignor to the assignee. Unlike traditional facilities that provide access to working capital, which can be secured with the pledge on receivables, factoring facilities rely on the institution of account receivable assignment and, as a result, once its enforceability is ensured and given notice of to the assigned debtor, the latter is held to pay to the assignee (except for the cases provided under the special law).
What are your references when you review the Certain, of a Fixed Amount and Due nature of Accounts Receivables?
An account receivable is certain when it stems from the very claim instrument or from other instruments (INVOICE), even if not authentic, issued or recognized by the debtor. An account receivable is of a fixed amount when its amount is determined (VALUE) under the very claim instrument or when this could be determined with the aid of the claim instrument and/or of other non-authentic instruments either issued or recognized by it, or enforceable against it under legal provisions or provisions laid down in the claim instrument. An account receivable is due when this has not been paid before the handing-over time, or it has not yet reached its agreed due date (MEANING, IS PAYABLE).
Which are the implications of the Government Ordinance no. 23/2017 regarding the split VAT on factoring operations?
a) As regards the VAT that is part of the assigned receivables: Pursuant to art. 3 para, 5 letter e, and art. 15 para. 4 of the Government Ordinance no. 23/2017 regarding the split VAT, the provisions of the Government Ordinance no. 23/2017 regarding the split VAT (the Ordinance) do not apply in case of the financing granted by the credit institutions and non-banking financial institutions by taking over the receivables. Consequently, factoring operations (financing by taking over the receivables) do not fall within the scope of the split VAT regulations, for which reason:
- the Factor shall make payment of the receivables to Adherents into any of their accounts, according to the factoring documentation, and
- the Debtors will pay the invoices assigned into the collector account of the Factor, as given notice of to the Debtor,
without split VAT being required for these payments, irrespective if the parties involved in the factoring operation (Adherent, Debtor or Factor) have opted or not for split VAT, b) As to the VAT related to the factoring/financing fees: When the factoring costs (including VAT) are retained at the time of the financing, with the consequence of reducing the financed amount by the amount of these costs, payment of the fees is made under a setoff operation, with no effective transfer of any amounts between the Factor and the Adherent, but only with the offsetting of a debt (of the Adherent to the Factor) against a receivable (of the Adherent from the Factor). Consequently, the VAT amount falls outside the scope of the Government Ordinance no. 23/2017, in observance of the exclusions provided at art. 3 para. (5) letter c): “Exclusions from split VAT provided at art. 3 para. (5): When the payment is made by setoff.” When the Adherent makes payment of the factoring/financing fees directly to the Factor, or the factoring operations help recover the amounts due from the Adherent, with the consequence of a direct transfer of amounts between the Factor and the Adherent, then payment/recovery of the VAT relative to these fees needs to be made in observance of the provisions of the Ordinance, as follows:
- from the VAT account of the Adherent, when the Adherent applies split VAT
- from the current account of the Adherent, when the Adherent does not apply split VAT,
- into the VAT account of the Factor, when the Factor applies split VAT
- into the current account of the Factor, when the Factor does not apply split VAT.
Is factoring more expensive than other financing services?
Factoring is a one-of-its-kind combination of financing and services.
For this reason, no strict comparison between the Factoring costs and the standard short-term financing or credit insurance policy costs is possible. Factoring does not only include financing (the cost of which is comparable with the standard bank lending), but also receivable collection and up to 100% payment default hedging services. The costs paid by the company to have the responsibility for these services transferred to the Factor are determined, according to the particulars of each business relation, in an amount that would ensure both equity and profitability for the Factor. The cost of not collecting the receivables, and the consequences of such an event on your business – lost profit, cost of legal proceedings against the debtor to recover the debts – are by far higher than the cost of factoring.
Do you also finance the VAT, or only the net amount of the invoices?
Factoring relies on the purchase by the Factor of your account receivables with a given debtor.
The amount of the receivable includes also the VAT, and the Factor collects, on the due date, the entire amount of the receivable and not only the net amount thereof. The entire receivable is financed, including the VAT, where necessary.
How can I be sure that I will promptly collect the receivables? In the end of the day, the longer these remain outstanding, the higher the interests you will charge.
To survive as factors, we are bound to offer our clients services of a quality beyond reproach.
Otherwise, we will see our clients leaving us fast, and this would affect us in a manner that cannot be compensated by the very small amount we would gain from a slow collection of receivables. At the same time, in some instances, we assume the risk of non-collection. It is common knowledge that, the longer a receivable remains not collected, the lower the chances to ever recover the money. We don’t want to add to the risk thus assumed. On the other hand, the costs of a factoring operation consist of the interests and fees charged by the factor for the services rendered, and these income increases proportionally with the speed of receivable collection.
Assuming I use factoring services, will my customer think that my financial standings are not satisfactory?
You should not be concerned about this.
Factoring has developed so much that, most likely, your customers have already come into contact with a factor, either as client for these services, or as a debtor. Factoring is both a flexible financing instrument, which does not require collateral guarantees, as well as a means to outsource given activities with a view to streamlining operation of companies. Moreover, the Factor will be there for you to provide any explanations your customers might need.
I get everything I need from letters of credit. Why would I need Factoring?
If your existing or potential customers are able to provide with these instrument, then you should continue walking down this avenue.
However, you might notice that increasingly fewer customers will show any interest whatsoever in making purchases from vendors demanding for such instruments. These will not be willing to consume any of their financing capacity to provide support in making purchases with payment on due date. Similarly, when they use these instruments, increased attention needs to be paid to their management. If you want boos your sales, you need to show flexibility to your customers, and set credit limits. Factoring can help you put in place such conditions, with no prejudice whatsoever to the safety and/or the financial resources of your business.
Which are the risks covered in case of non-recourse factoring?
Insolvency, bankruptcy and prolonged payment default of the Debtor. The risks of dispute are not covered as these are outside the control of the Factor, and depend exclusively on the performance capacity of the Vendor and their relation with the Debtor.
Do you also cover for the risk of customer insolvency before shipment of the goods?
We do not cover for this risk. The risk coverage comes into effect on the day when the goods are shipped, which can be the same with the invoice issuing day. The pre-shipment risk may be insured by certain insurers, but for significant costs.
When an invoice is challenged, and the company providing factoring services assumes no risk whatsoever, what would be their interest in solving the problem expeditiously and efficiently?
Disputes are generated, in most cases, by elements in connection with the performance capacity of the Adherent or miscommunication with the Debtor (quality/quantity of goods, late delivery, etc.), and these are completely outside the control of the factor. As such, this should remain impartial. As Factors, we strive to obtain expeditious settlement of any dispute because, as soon as this is accomplished, the factoring facility can resume its normal course. Otherwise, the financial standings of the Adherent and/or the Debtor can deteriorate and, implicitly, the risk for the Factor is increased.
Will the two-factor international factoring system extend the time needed for the payments to reach me?
The most difficult part in a commercial relation is to separate sale from collection.
We believe that the Factors the RFA works with (members of the Factors Chain International – FCI) are able, in most cases, to obtain payments faster than you could. The language, time zone, legal framework and cultural differences can render collection extremely difficult in certain countries, and intervention of a local partner can significantly reduce the collection time. Thus, the longer collection time caused by the intervention of a local partner in the process is offset by their collection efficiency. However, there is also the alternative that the Export Factor collects directly from the Importer, in which case the circuit can be shortened, while preserving the collection efficiency.
Are the external market fully covered by factoring services?
Over the last 30 years, factoring has boosted and is now present in 67 countries.
There is also a limited number of countries where the political, legislative and economic conditions and systems give rise to a risk that is too high for the Factors to assume. In such instances, it is more appropriate that you use Letters of Credit or Letter of Bank Guarantee –, however, bearing in mind that these could not be available either.
How much time is needed to respond to requests for credit limits?
The response time may vary from factor to factor or from country to country, particularly according to the availability of the information about Debtors.
In some countries, this is public, while in others, obtaining such requires approval of, and contacting the Debtor.
Which is VAT applied on the costs charged for the factoring operations?
According to the Tax Code (Law no. 141/2003), and the Methodological Rules (art. 141 para. 2), further to implementation of the Judgment of the European Court of Justice in case C305/01 M.K.G, the costs charged by the Factor bear the VAT. The VAT is NOT a cost per se, and can be deducted according to the rules in effect.
Does my commercial contract provides for a prohibition of assignment? If so, what can I do?
According to the legislation in effect (Civil Code, art. 1570 and 1573), even when assignment is prohibited or limited under the agreement between the parties, such prohibition or limitation shall not be effect if “the assignment concerns a receivable the subject matter of which is an amount of money”, like in case of the accounts receivables assigned in the factoring operations.
As regards the non-assignability of monetary receivables though, it needs to be note that there are certain laws that prohibit and limit their assignment (Law no. 125/2011, where the prior agreement of the debtors which are public institutions is required). Nevertheless, it is recommended that, when such clauses exist, in order not to adversely affect the relation between the Adherent and the Debtor, the first informs the latter about their intention to assign, or even obtains the written agreement thereof (we recommend this in particular for transactions where debtors are large companies, the power of negotiation of which exceeds that of the Adherent).
Are invoices paid by cheques on due date accepted for disbursement? Why?
Cheques are spot payment instruments, and not on a due date in the future (see the Promissory Note).
In 2008, the Law of cheques (no. 59/1934) was amended under the Government Emergency Ordinance no. 38/2008 and expressly prohibited the post-dating of cheques precisely to clearly determine the role of the cheque as a payment instrument, and not as a credit title. This amendment translated into practice in a prohibition to present for payment a cheque that has filled in a date after their submission date.
Why is a fee charged on invoices if the factoring that not provide any financing?
In case of factoring facilities, the interest is the cost of financing, while the fee is the cost of the related services rendered by the Factor: management, collection and covering for the risk of default of accounts receivable.
While financing is optional and occurs up to the approved ceiling, the services are rendered for the entire portfolio (to remain under the coverage ceiling; insofar as these is released by collection, the non-covered receivables are brought under the scope of coverage).
If you set a factoring limit of RON 100,000 for me, does this mean that I will get RON 100,000 in my account if I bring you invoices of this amount?
The amount that you get depends on the financing percentage agreed-upon under the Factoring Agreement.
If this is 80%, you will receive RON 80,000 (less the factoring costs, pursuant to the Factoring Agreement).
If, at request, only 80% of the invoice amount is given, does this mean that the remaining 20% is retained by the institution providing the factoring services?
According to the type of product you use: you receive the 20% different (net of any of your debts to the Factor under the Factoring Agreement) at collection by the Factor from the Debtor.
When the invoice is not collected within the agreed term, and the Factor has a right of recourse, this shall recover from you the amount initially advance, and it shall rest with you to recover the full amount from the Debtor; for a non-recourse facility, when the coverage percentage is, for instance 100%, and the financing percentage 80%, the Factor shall transfer to you, on the date set under the Factoring Agreement, the difference of 20% (net of any of your debts to the Factor under the Factoring Agreement).