21 February, 2016
Introduction
Receivables nancing (or debtor nancing) has grown to become a well-established means for raising nance in the Australian market, and is particularly attractive to businesses that generate a healthy ow of receivables from customers with a strong credit background.
According to the latest statistics from the Debtor and Invoice Finance Association (DIFA), the total turnover in debtor nancing for the year ending September 2015 was over A$64 billion1. By comparison, the turnover for the year ending on September 2005 was $35.5 billion2.
There are a broad range of participants in the receivables nancing market in Australia, ranging from major banks to specialist debtor
Finance providers. Despite the diversity of participants, most receivables nancing transactions in Australia will include a number of key features. Those features include:
- a transfer of ownership and a right to disclose to customers,
- a review by the nancier of the terms of underlying receivables,
- an analysis of the nancier’s priority interest in the receivables; and
- an analysis of any potential duty arising under the transaction.
Across a number of instalments over the next few weeks, we will give some insights into the key features of receivables nancing in Australia, and offer a guide for financiers participating in the market.
The importance of retaining a right to disclose
In this first instalment, we’ll take a look at the importance of retaining a right to disclose a transfer of ownership to the seller’s customers.
Disclosure: must the debtor be informed?
In many cases, businesses that sell receivables (sellers) prefer that their customers (debtors) remain unaware that the debt owed by them to the seller has been sold to a financier. This can be attributed partly to an outdated perception that receivables nancing arrangements can be a last resort for cash-strapped businesses and that the nancier is somehow intervening in the business. In any event, most financiers are usually able to accommodate the seller’s wishes and are prepared to purchase receivables without the debtor being noti ed at the outset.
However, retaining a right to notify a debtor of the receivable sale is critical for the financier, particularly following the occurrence of a default under the nancing arrangements. This is because, for so long as the debtor remains unaware of the sale, the transfer of the receivable from seller to nancier only takes effect as an equitable assignment. This means that, until the assignment is “perfected” by written notice to the debtor (at which point the transfer will become a legal assignment, provided certain other legal formalities have been satis ed1), the nancier must join the seller in any legal action it wishes to take against a debtor.
Retaining a right to notify a debtor of the receivables sale is critical for the nancier, particularly following the occurrence of a default under the nancing arrangements. Trent Chugg, Counsel, Ashurst Australia
It is essential, therefore, that the facility documentation includes the following framework regarding disclosure:
1 the seller must at all times co-operate with the nancier with respect to the enforcement of purchased receivables and must, for example, give notice to a debtor or initiate proceedings against a debtor when requested by the financier
2 following the occurrence of a default (or any other critical trigger event), the nancier must be entitled to give a notice of assignment to any debtor (ie, give effect to a legal assignment) without any further consent or other action being required from the seller
3 the seller must grant a power of attorney in favour of the nancier authorising it (typically following the occurrence of a default) to do all things necessary in the seller’s name to give effect to the legal assignment of any receivable, including the satisfaction of all statutory requirements, and the exercise of any other rights of the nancier under the nancing arrangement
1 DIFA Update for September quarter 2015, 16 November 2015
2 DIFA Update for September quarter 2015, 16 November 2015
For further information, please contact:
Graeme Tucker, Partner, Ashurst
graeme.tucker@ashurst.com
