Documentation Related to Factoring
Upon the transfer of each accounts receivable to a factor on the basis of factoring, the assignor and/or the debtor must, at the factor's request, provide the factor with the documentation related to factoring. This documentation falls into two groups: first, documents confirming the existence of the accounts receivable; and second, a copy of the notice sent in writing — including electronically — regarding the transfer of the accounts receivable to the factor, addressed to the debtor or, in the case of reverse factoring, to the creditor. The documentation is submitted upon the factor's request, meaning that the factor itself determines the moment when it needs this material in order to carry out and control the transaction.
Such documents give the factor the opportunity to verify that the transferred receivable actually exists and that the debtor and the other party were informed of the transfer in a timely manner. The written form, including electronic transmission, ensures that the fact of notification can be evidenced in case of subsequent disputes.
Notice of the Transfer and Coverage of the Receivable
The debtor pays the accounts receivable acquired by the factor, provided for by the tax invoice or the invoice, and the payment is made in accordance with that same tax invoice or invoice. Furthermore, no later than the next business day after the transfer of the accounts receivable to the factor, the debtor must be notified thereof in writing — including electronically — and must be provided with the information necessary for payment of the receivable: the tax invoice or invoice confirming the existence of the claim against the debtor, information on the volume of the receivable transferred to the factor, its payment conditions, and the bank details of the factor that owns the receivable arising from the tax invoice or invoice.
The items listed in the notice have an important practical function for the debtor: it becomes clear to whom payment must be made, in what amount, and on what conditions. Without this, the debtor cannot assess who the authorised recipient of payment is and, accordingly, cannot properly perform its own obligation.
After receiving the notice, the debtor is obliged to compensate the factor for the accounts receivable transferred to it, in the appropriate amount, within the period determined by the underlying contract. Factoring thus does not change the payment period — it remains what was stipulated in the underlying contract; only the recipient of the debtor's payment changes.
Collection of Overdue Receivables
When collecting factoring-related overdue accounts receivable, the factor acts in its own name. This means that where the debtor fails to cover the receivable within the period and the factor begins the collection process, it acts in that process as an independent entity, in the name of the new owner of the receivable, and not as a representative of the assignor.
The Liability of the Assignor
The assignor is liable for the accuracy and authenticity of the accounts receivable transferred to the factor on the basis of factoring. This includes the requirement that the volume of the receivable at the moment of its transfer to the factor be exact. In determining this liability, account is taken of any set-off agreement that may exist between the assignor and the debtor: if such an agreement exists between the parties, it is taken into consideration when assessing the volume of the receivable whose accuracy the assignor guarantees.
If the accounts receivable transferred by the assignor to the factor becomes disputed — including where the goods provided for by the underlying contract are defective — the assignor is obliged to cover the accounts receivable towards the factor in the amount provided for by the factoring contract, within the period determined by the same contract. It is particularly important that this rule applies also where the parties agreed on factoring without the right of recourse. In other words, factoring without recourse does not release the assignor from liability where the receivable itself is disputed (for example, due to defective goods), even though the mere non-payment by the debtor would otherwise remain the factor's risk.
The Debtor's Rights and the Effects of the Transfer
Upon the transfer of the accounts receivable to the factor, the means of securing that receivable and other rights related to the corresponding claim pass to it. This rule applies even if the parties to the underlying contract agreed otherwise — the transfer automatically extends to the security and ancillary rights, and a different agreement between the parties cannot cancel this effect.
The debtor has the right to raise against the factor all defences that it had against the assignor at the time of receiving notice of the transfer of the accounts receivable to the factor. The debtor can therefore assert against the factor the same position it held against the original creditor — every defence existing against the receivable may also be invoked against the factor.
If there is a set-off agreement that provides for the set-off of precisely the accounts receivable that is transferred to the factor, the debtor has the right to exercise that right of set-off against the factor as well. The law thereby protects the debtor's position acquired under the set-off agreement — a change in the owner of the receivable cannot cancel that right.
It is impermissible for the debtor or a mortgagor to restrict the creditor's right to transfer the accounts receivable to a factor. It is likewise impermissible for the debtor to impose on the creditor an additional condition for transferring the receivable to a factor. The existence of such a restriction and/or additional condition is void from the outset — a provision written into a contract for this purpose acquires no legal effect and does not limit the right of transfer.
As for the subsequent fate of the receivable: unless otherwise determined by the factoring contract, the transfer of the accounts receivable by the factor to another factor is admissible, subject to compliance with the provisions of the law. A receivable may therefore be transferred onward to a new factor, provided this is not prohibited by the contract and the requirements of the law are observed.