What is an assignment of receivables?
Whenever we begin to explore a previously unfamiliar topic, there are important terms, without which understanding the whole issue is severely hampered, if not impossible. This is no different.
The dictionary meaning of the word assignment is the relinquishment of part or all of an individual’s rights to another person. In a situation where we have a right to a claim (for example, we are awaiting payment of an obligation from a counterparty), we can relinquish the right to the claim by giving it to a third party – the buyer of the claim. To this end, we enter into a contract of sale, donation, exchange or any other agreement with which the transfer of rights is clear.
Important!
Art. 509 of the Civil Code specifies that a creditor may transfer a claim to a third party even without the consent of the debtor – unless this would be contrary to the law, a contractual stipulation or the nature of the obligation. This means that the sale of receivables can – under certain conditions – take place without involving the debtor in the process. We will return to this later in the article.
In a possible contract of assignment of claims, the parties are: the assignor – otherwise known as the creditor, i.e. the person who relinquishes rights to the claim to another entity, and the assignee – the buyer of the claim.
Important!
In Art. 509 §2 of the Civil Code reads that the purchaser, when deciding to purchase a receivable, also gains the right to claim overdue interest and any other rights arising from the purchased receivable.
How does the process of assigning receivables work?
The entire process of transferring claims can be encapsulated in several steps. Here is a description of a sample assignment:
Emergence of claims
First, the situation from which the claim arises must arise. In our example, Mr. Arkadiusz, who runs a sole proprietorship, invoiced his contractor, Mr. Jack, for a service rendered – servicing dozens of company computers. The payment term for this invoice is 60 days. With the issuance of the document, a claim is created, which Mr. Arkadiusz can assign to an entity or a third party.
Preparing to enter into an assignment of receivables
Further down the line, it may turn out that – although Mr. Arkadiusz’s company has issued an invoice with a 60-day payment deadline – it cannot afford to wait until the due date. Business practice in Poland, moreover, shows that more than half of entrepreneurs pay their invoices late, which could mean that Mr. Arkadiusz will wait not 60 days, but even longer, for payment.
As a result, the entrepreneur decides to assign the claim to another entity. That’s how – in a nutshell – invoice financing works at PragmaGO.
Mr. Arkadiusz finds a company that decides to purchase the claim from him. In this situation, Mr. Arkadiusz becomes the assignor, while the buyer of the claim becomes the assignee. The parties then agree on the details, such as the form and term of payment or the type of agreement (it can be a written agreement or even a notarial deed – a debt transfer should not be implemented on the basis of an oral agreement).
Contacting the debtor
The next step should be to inform the debtor of the assignment. Although in most cases we don’t need permission to execute an assignment, the debtor must be aware that there has been a transfer of the claim – if only because he should make payments to the new bank account number.
Lack of clear information may result in the debtor paying the previous creditor. This will only lengthen the path the receivable must take.
In a situation where a creditor has notified the debtor that an assignment has taken place, and the debtor nevertheless makes a transfer to the wrong account (for example, to the account of a previous creditor), the current creditor may demand payment from the debtor. This is mentioned in Art. 512 KC:
As long as the transferor has not notified the debtor of the transfer, performance to the previous creditor has effect against the transferee, unless the debtor knew of the transfer at the time of performance. This provision shall apply mutatis mutandis to other legal transactions between the debtor and the previous creditor.
Transfer of receivables
Finally, there is an assignment of receivables, in accordance with the terms of the agreement between the assignor and assignee. This agreement should state what type of receivables the assignment concerns, as well as the value of the assignment and the due date.
When can an assignment be invalid?
There are several situations in which it is impossible to make an assignment of claims under penalty of invalidity:
- When the parties to a transaction have indicated in the contract between them that the claim and the rights arising from it cannot be transferred to another person or entity – this is called an exclusion of the transfer of the claim.
- When the parties to the transaction establish restrictions on the transfer of claims in the contract and these provisions are broken.
- When the assignment opposes the nature of the obligation. This applies to situations where it matters to whom the debtor owes money (e.g., in the case of alimony payments, claims for pension rights, claims for protection of property), as well as when the purpose of the claim can only be achieved if the performance is fulfilled personally to the creditor (this applies to parts of contracts of mandate, contracts of work, leases and rental agreements).
Assignment of receivables orally – is it possible?
In theory, drafting an assignment agreement in writing is not necessary. It can even be concluded verbally, but in the vast majority of cases Art. 511 of the Civil Code, which states that “if a claim is stated in writing, the transfer of that claim should also be stated in writing.”
Moreover, the written form of the assignment significantly facilitates the resolution of any disputes. Even the above-cited Art. 511 of the Civil Code, however, does not preclude the possibility of an assignment based on an oral agreement. This is evidenced by the Supreme Court Judgment of dn. 8.02.2002 r. (ref. II CKN 1160/99), which reads:
The provision of Art. 511 of the Civil Code does not provide for the rigor of nullity if the transfer is made without the requirement of written form. In such a situation, according to Art. 74 § 1 of the Civil Code, failure to observe the written form stipulated in Art. 511 of the Civil Code does not result in the invalidity of the transfer agreement, but only in certain statutory limitations of evidence.
Assignment notarized – when is it mandatory?
Notarization of the assignment of receivables can not only be an additional safeguard against possible problems with the enforcement of the assignment provisions, but also an obligation.
If the creditor has taken legal action against the debtor for an unpaid debt, won the case, and an enforceability clause was imposed on the court judgment or payment order before the assignment was made, the transfer of the claim must be notarized.
Only in this way will the current owner of the claim be able to refer the case to the bailiff without hindrance. If the parties to the assignment decided to enter into it without a notarial deed, the creditor would have no recourse to an already issued judgment or order for payment – after all, all the court documents would refer to a different entity or person.
Assignment of receivables vs. factoring
The concepts of assignment of receivables and factoring are largely intertwined. Factoring service usually boils down to invoice financing, that is, just selling receivables to a factoring company for a certain price. Factoring allows you to regain or strengthen your company’s liquidity, since most of the amount arising from the receivables (up to 90%) is received immediately.
The permanent factoring service at PragmaGO involves compiling a list of contractors with whom we work and to whom we issue sales documents regularly and sending them to the factor. As a result, our company will receive transfers for invoices directly from the factoring company as soon as the sales document is issued.
In many factoring companies, it is possible to buy back a single invoice. All you have to do is apply online and then wait a few hours for the funds to be transferred. Each time you use a factoring service, you may actually be making an assignment of receivables. In this arrangement, the factor can also be called the assignee, while the factor becomes the de facto assignor.
PragmaGO’s factoring, however, comes in three forms: single invoice redemption, permanent online factoring, and financing for company purchases. Depending on the type of factoring chosen (and, consequently, the contract drawn up), the financial liability arrangements for the debtor’s insolvency may vary.
So what are the differences between assignment and factoring?
While carrying out an assignment of receivables makes a simple, one-time exchange, using factoring allows you to opt for a range of additional services.
One of the additional services available in factoring, is the possibility of insuring receivables in case of debtor insolvency. Insurance can cover part or all of the amount.
Another service that we can choose on occasion, as it were, is monitoring of receivables – popular especially among small companies that do not have their own accounting department. The factoring company can also verify foreign counterparties at the request of the factor and assess their solvency and payment discipline.
