19 February, 2016
Purchasing debts: don’t leave the extras behind
Debtor financing documentation will include a mechanism for the transfer of title to receivables from seller to financier once the seller’s offer to sell the receivable has been accepted by the financier (usually signified by the payment of a purchase price).
Typically the “receivable” will be described as the seller’s interest in, and its right to receive, payment from a debtor under an underlying sale contract.
Typically, the documentation will also seek to capture the transfer of a range of related rights to the financier. In addition to the seller’s right to the receivable itself, the “related rights” should encompass all of the seller’s other rights in connection with a receivable that the financier would expect to acquire when acquiring the receivable itself.
The financier should give careful consideration to capturing the full extent of the seller’s related rights in each transaction, particularly with respect to its sophisticated customers who have given the seller the benefit of credit enhancements such as guarantees and security supporting the debtor’s payment of the receivable. As a guideline, financiers should consider including the following seller’s rights as part of the suite of related rights to be transferred with each purchased receivable:
- the right to the proceeds of the receivables in any form (this right should always be included);
- the right to the proceeds of any insurance relating to the receivables;
- the right to all documents of title, books, records and other documents recording or evidencing the receivables;
- all rights under the underlying sale contracts and related credit support, including any indemnities, guarantees and security granted in favour of the seller; and
- rights to all returned goods and the proceeds of the sale of those goods.
The financier should be careful, however, to ensure that the facility documentation expressly states that, despite the transfer of rights described above, the financier will not adopt or incur any liability or obligation to the debtor, or any other person, in connection with its purchase of the receivable or any related rights.
The financier should also check the assignability of the receivables and related rights when undertaking its review of the underlying sales contracts: a topic we considered in Part 3 of this series ‘The importance of reviewing the underlying contracts’.
For further information, please contact:
Tim Brookes, Partner, Ashurst
tim.brookes@ashurst.com
