The Status and Legal Form of a Factoring Company
A factoring company may exist only in the legal form of a limited liability company or a joint-stock company. It is obliged to create a supervisory board, to which the rules established by the law on entrepreneurs for the supervisory board of a joint-stock company must be applied. The supervisory board thus operates under the same standard as in joint-stock companies, which provides additional rigour in corporate governance.
Participatory share in a factoring company is prohibited for a commercial bank, a microbank, a microfinance organisation and their related persons. This prohibition serves the separation of the interests of participants in the factoring market.
A terminological monopoly is also protected: no one has the right to use the term "factor" or "factoring company" or any other wording containing that term without being registered as a factoring company. An exception applies where the use of the term or wording is established or recognised by law or an international treaty of Georgia, or where it is clear from the context in which the term is used that the respective entity does not carry out the activity provided for by the law on factoring.
Permitted Activities and Prohibitions
A factoring company has the right to carry out only two types of activity: factoring and factoring-related services. At the same time, it is prohibited from accepting deposits both from natural persons and from legal entities. It is likewise prohibited from accepting returnable monetary funds both from natural persons and from legal entities, except from the partners of the factoring company itself and from financial institutions, including a financial institution of a foreign country.
The prohibition on returnable funds does not extend to the public offering of securities and the private offering of securities to an informed (experienced) investor as defined by the Georgian law on the securities market, nor to cases determined by the National Bank of Georgia. The National Bank is authorised to determine, by normative act, the procedure for providing essential information to the parties to factoring when services are rendered, and to impose additional requirements and/or restrictions on a specific activity of the factoring company.
Capital Requirements
For a person to be registered as a factoring company, its paid-up capital must amount to at least 300,000 lari. Moreover, the factoring company is obliged not to reduce the minimum amount of paid-up capital throughout the entire period of its activity — this threshold is not a one-off entry condition but a permanent operational requirement. The own capital of a factoring company must also amount to at least 300,000 lari. The National Bank of Georgia is authorised to establish, by normative act, additional requirements related to capital, including the procedure for the formation of own capital.
Registration as a Factoring Company
A person is obliged to register as a factoring company if, on the basis of a contract on the transfer of claims, in any period of time, it has the right of claim simultaneously on at least 5 accounts receivable. A person may carry out factoring only after its registration as a factoring company by the National Bank of Georgia.
The rules for the registration, cancellation of registration and regulation of factoring companies are established by the National Bank of Georgia, which also publishes information about registered factoring companies on its official website — so every customer is able to verify whether it is dealing with a registered entity.
The registration obligation does not extend to cases related to the reorganisation or merger of enterprises or the transfer of accounts receivable; taking into account the specificity and content of a transaction, the National Bank is also authorised to determine exceptions from this obligation.
Suitability Criteria
The law imposes strict requirements on the persons managing a factoring company. A person is prohibited from being an administrator of a factoring company if:
- it participated in an operation that caused significant damage to a financial institution, infringed the rights of depositors or other creditors of the financial institution, or caused their insolvency or bankruptcy;
- it was an administrator of a financial institution and, as a result of its activity, that financial institution became insolvent;
- it failed to perform a financial obligation towards any financial institution;
- it has been convicted of a serious or especially serious crime, terrorism financing and/or legalisation of illegal income, or another economic crime;
- it does not have appropriate education and/or experience.
An administrator is prohibited from participating in the adoption of a decision in which it has a personal interest. A director (member of the board of directors) of a factoring company may not simultaneously be a partner (shareholder), member of the supervisory board or member of the board of directors of any financial institution. A person convicted of the crimes indicated above is also prohibited from holding a significant share in a factoring company as defined by law and from being a beneficial owner.
Supervision and Registration of the Factoring Contract
The activity of a factoring company is supervised and regulated by the National Bank of Georgia, within the powers determined by the organic law on the National Bank of Georgia, the law on factoring and other legislative and sub-legislative normative acts.
The factoring transaction itself is registered in the factoring register: only the factor has the right to apply to the public registry to register factoring in the factoring register. Ownership of the right of claim arising from the accounts receivable is in force from the moment of its registration in the factoring register. Matters related to registration are regulated by the Georgian law on the public registry and a normative act of the minister of justice. A written agreement is void if, as its result, ownership of the accounts receivable passes to the buyer while the factor's ownership right over it is registered in the factoring register — in other words, another transaction cannot override the factor's right already existing in the register.
The law also defines the institution of the factoring platform: an electronic platform whose main activity is providing exchange-type services for factoring transactions, including the automation of transactions and the electronic performance of other actions related to the conclusion of the agreement. Exchange-type services mean the placement of the accounts receivable on the platform by the assignor — or, in reverse factoring, by the debtor — in order to receive funding from the factors participating in the platform. The platform must have rules and procedures ensuring the integrity and security of the accounting system, as well as publicly disclosed, transparent, objective and non-discriminatory participation criteria.
Audit, Reporting and Sanctions
A factoring company (and a factoring platform) is obliged to conduct transparent financial and tax reporting and observe the principle of publicity; to develop and implement an internal control system, including a compliance control system for the prevention of money laundering and terrorism financing; to invite an auditor annually for the audit of its financial statements; to be responsible for the reliability of reporting and its complete presentation; to submit financial reporting to the National Bank — its form, submission deadline and procedure are determined by a normative act of the National Bank — and to submit reporting on the prevention of money laundering in the appropriate format and within the established deadlines.
If a factoring company fails to submit such reporting to the National Bank twice in a row, in the form and with the periodicity determined by it and by Georgian legislation, the National Bank is authorised to cancel its registration.
In case of violations, the National Bank applies sanctions to the factoring company and its administrators if the company or administrator has violated any provision of the law or of any provision, rule, decision, requirement or written instruction of the National Bank, or a restriction established by it; any condition or restriction accompanying the registration; a reporting deadline (or has submitted incorrect reporting or other inaccurate information); the requirements for the prevention of money laundering and terrorism financing; the requirements related to the carrying out of factoring; or has carried out an unhealthy or dangerous entrepreneurial practice.
Each tier of sanctions is provided for separately, and the National Bank applies them proportionately and consistently, or — depending on the seriousness of the violation and the existing or possible risk — inconsistently:
- sending a written warning to the factoring company and/or its administrator;
- imposing special measures or issuing an instruction/direction requiring that the violation be stopped and not allowed again and that the necessary measures be taken within the deadline determined by the National Bank;
- imposing a monetary fine according to the procedure and amount determined by the National Bank;
- suspending the administrator's authority to sign and demanding its temporary suspension or dismissal from office;
- prohibiting the distribution of profit, the accrual and payment of dividends, the increase of remuneration, and the payment of bonuses and other similar remuneration;
- suspending or restricting certain types of operations;
- cancelling the registration.
The procedure for determining, imposing and executing the amount of monetary fines is established by the National Bank by normative act — the exact amount of the fine is therefore not set out in the law itself and is determined precisely by that procedure.