The Concept and Object of Factoring
Factoring is a transaction that involves the transfer of accounts receivable arising from an underlying contract and the registration of that transaction in the factoring register. As a result of the registration, the ownership of the claim arising from the accounts receivable passes to the respective factor. The essence of the transaction therefore rests on two interconnected elements — the transfer of the receivable to the factor and its entry in the factoring register; without registration, ownership of the claim does not pass.
Accounts receivable means any existing short-term unconditional right to claim payment of a sum of money arising from the supply of goods or the provision of services under an underlying contract — including the supply of a product or service related to intellectual property — in whole or in part. Rights to payment arising from a cheque, a promissory note, a security, a letter of credit or a deposit account are excluded from this definition. The term short-term means that the payment period of the receivable does not exceed 1 year from its origination. It is also important that, for the purposes of the law, the provision of services does not cover employment relationships, so claims related to wages remain outside the scope of factoring.
The object of factoring may only be the transfer of accounts receivable. It is impermissible for the object of factoring to be the transfer of accounts receivable arising from the supply of goods or provision of services for personal or household needs, except where trading in goods or the provision of services forms part of the entrepreneurial activity of the assignor.
For the purposes of factoring, the document confirming the existence of a claim against the debtor is a tax invoice issued in electronic form. Where, in cases determined by Georgian legislation, a tax invoice is not issued, an invoice serves as the confirming document. The identification of an invoice must be simple: it must bear a unique identification code assigned by the issuer of the invoice.
The Parties to Factoring and Their Status
Factoring has only two parties — the assignor and the factor. The assignor is the person who is a party both to the factoring contract and to the underlying contract and who, in accordance with the factoring contract, transfers the accounts receivable arising from the underlying contract to the factor. The eligibility requirements for the assignor are broad: it may be any legal entity, individual entrepreneur or other organisational entity that is not a legal entity.
Only the entities defined by the law have the right to carry out factoring and provide factoring-related services. A factoring company is a legal entity established in the legal form of a limited liability company or a joint-stock company and registered by the National Bank of Georgia. At the same time, a commercial bank and a microbank licensed by the National Bank of Georgia, as well as a registered microfinance organisation, also have the right to carry out factoring under Georgian legislation.
The figure of the debtor should be distinguished: the debtor is a legal entity, individual entrepreneur or other organisational entity that is a party to the underlying contract and against whom the accounts receivable exists. The debtor is not a party to the factoring contract, but the consequences of the transaction affect it directly, since the new owner of the receivable becomes the factor.
Types of Factoring — With and Without Recourse
Factoring may be concluded either with the right of recourse or without it, and this choice determines who bears the risk if the debtor fails to cover the receivable.
Under factoring concluded without the right of recourse, the factor has no right of claim against the assignor if the debtor fails to cover the corresponding receivable. In practical terms, the risk of the debtor's non-performance shifts to the factor.
Under factoring concluded with the right of recourse, the factor has a right of recourse against the assignor if the debtor fails to cover the corresponding receivable. In that case the factor is entitled to demand satisfaction of the transferred claim either from the debtor or from the assignor. The assignor, in turn, has the right to refuse satisfaction of the factor until the factor attempts enforcement against the debtor. After exercising the right of recourse against the assignor, the factor must return the accounts receivable to the assignor, unless the factor and the assignor agree otherwise.
If it is impossible to determine whether factoring was concluded between the parties with or without the right of recourse, the factoring is deemed to have been concluded without the right of recourse — a rule that operates as a reinforcing safeguard for the assignor.
The law also distinguishes the organisational systems of factoring: in a one-factor system the factor is only a factor resident in Georgia, while in a two-factor system the parties to factoring are a factor resident in Georgia and a factor non-resident in Georgia. It is also permitted to register the ownership rights of different factors over different parts of one and the same accounts receivable.
Reverse Factoring
One type of factoring is reverse factoring, whose initiator is the debtor. Here the initiator of the transaction is not the creditor but the indebted party, which fundamentally distinguishes this type from other forms of factoring.
The prior written consent of the creditor is required to carry out reverse factoring. As a result of its implementation, the factor assumes the obligation to cover the accounts receivable towards the creditor of the debtor: the factor covers the receivable within the period determined by the written agreement concluded between the debtor and the creditor, or before that period falls due.
The provisions of the law relating to factoring also extend to reverse factoring, provided that these provisions do not contradict the essence of reverse factoring. This means that the general rules on recourse, form and content also apply here, to the extent compatible with the nature of the transaction.
The Form and Mandatory Content of the Contract
Factoring may be carried out only on the basis of a written contract, including a contract concluded in electronic form — an electronic contract means an electronic document as defined by the Georgian law on electronic documents and related trusted services. It is impermissible for factoring to be deemed a credit or loan agreement, except in cases determined by Georgian legislation.
The factoring contract — including the additional terms agreed in writing, including electronically, by the parties and the annexes to the contract, which constitute its integral and inseparable part — must specify the following data:
- information about the parties to factoring, including the names of the respective entities, identification numbers, legal addresses, and information about persons holding powers of representation;
- the type of factoring;
- the legal grounds of the accounts receivable that is the object of the factoring contract and other related information, including the volume of the transferred receivable, the method of its calculation, and the procedure and conditions for its payment to the authorised party;
- the amount of the benefit due to the factor, and the method of its calculation and payment;
- the dates of conclusion of the underlying contract and the factoring contract, as well as the validity period of the factoring contract;
- the signature of each party to the factoring contract and of its authorised representative;
- where the claim is secured — information about each object of security.
The contract must be accompanied, as an annex and in writing — including electronically — at minimum by: the underlying contract; the document confirming the existence of the claim against the debtor; information about the amount provided for in the confirming document; information about the payment date; and in the case of reverse factoring — also the written consent of the creditor.
Grounds for Nullity
The law strictly protects the uniqueness of ownership over accounts receivable: it is impermissible for one and the same accounts receivable to be transferred to several factors, except where ownership rights of different factors are registered over different parts of the same receivable.
The second ground concerns the sequence of transactions: any factoring contract concluded by the assignor after the transfer of the accounts receivable transferred on the basis of factoring is void. In other words, once the receivable has been transferred to the factor, the assignor can no longer transfer it again, and such a transaction acquires no legal force from the outset.