The opening of insolvency proceedings disrupts the legal relationships between the parties to a factoring contract. Protecting the rights of each party becomes a crucial issue. How can the effectiveness of the factoring mechanism be preserved in the face of the mandatory rules of insolvency proceedings? What strategies can the parties deploy to secure their position? For tailor-made support, please consult our lawyers specialising in factoring.
Impact of the member's insolvency proceedings
Validity of debt transfers during the suspect period
The suspect period preceding the opening of insolvency proceedings is a high-risk area for factoring transactions. Article L. 632-1 of the French Commercial Code provides for the automatic nullity of certain transactions carried out during this period.
Transfers of trade receivables made by a member to a factor during a suspect period cannot be cancelled ipso jure. This was clearly established by the Court of Cassation in its ruling of 17 June 1980. These transactions constitute payments received by the member and not payments made by it.
On the other hand, these transfers could fall within the scope of Article L. 632-2 of the French Commercial Code if the factor was aware that the subrogant was in a state of suspension of payments at the time of the transfer. However, case law accepts that the transactions are merely the application of a framework agreement that predates the suspect period.
Fate of the factoring contract after the commencement of proceedings
The continuation of a factoring contract after the opening of insolvency proceedings remains possible despite its intuitu personae nature. The Court of Cassation has ruled that this does not prevent the court-appointed administrator from exercising the option provided for in article L. 622-13 of the Commercial Code.
When the contract is continued, the factor is entitled to the preference of subsequent creditors for :
- Payment of approved invoices
- Remuneration for its services during the observation period
- Repayment of new advances
This preferential treatment is justified by the factor's contribution to the continuation of the business. For more details on factoring agreements, see our analysis of obligations and guarantees in factoring contracts.
Declaration of the factor's claims
The factor must declare its claims against the member within the statutory period of two months from publication of the judgment in the BODACC. This obligation applies to :
- Commissions and charges due before the opening of the account
- Claims arising from recourse against the member for fictitious claims
- Unpaid advances on unapproved receivables
Failure to make a declaration means that the claim cannot be set off against the proceedings. This sanction prevents any subsequent set-off between reciprocal claims.
Recourse and rights of the factor in relation to the procedure
Offsetting and reversing current account entries
Set-off is an essential protection mechanism for the factor. It enables the factor to offset the claims he has against the member against the credit balance on the current account.
To be effective, this compensation must meet a number of conditions:
- Claims must be related
- The factor must have declared his claim within the legal time limits
- The elements of the set-off must have existed prior to the opening judgment
Case law recognises the connected nature of debts assigned to current accounts. In two major rulings of 1 March 2005 and 19 April 2005, the Court of Cassation upheld clauses allowing the factor to debit its client's account for debts owed to it by the client.
Reversals also play a decisive role. If it occurs during the operation of the current account, it is deemed to be payment. On the other hand, once the account has been closed due to the opening of collective proceedings, it is only valid as payment if the balance is sufficiently positive to absorb the debit.
Claiming transferred receivables
The factor may rely on its status as owner of receivables duly transferred before the commencement of the proceedings. These receivables are not covered by the member's insolvency proceedings.
This right of ownership extends to claims arising from contracts in progress when the proceedings are opened. The Court of Cassation confirmed this solution in 2004, recognising that the opening of proceedings does not affect the effects of an assignment made beforehand, even if the claim is not due until afterwards.
However, this favourable position for the factor may be weakened in the event of a conflict with other rights holders, as we explain in our article on disputes between the factor and third parties.
Effectiveness of guarantees and securities
The guarantees put in place by the factor remain effective despite the insolvency proceedings, subject to certain conditions:
- Retention period remains enforceable against the member's creditors. This unavailability of the guarantee account is respected by the courts.
- Surety bonds remain valid, even though the guarantor may benefit from certain protective provisions in the event of collective proceedings against the principal debtor.
- Current account maintains its guarantee effect thanks to the compensatory mechanism, subject to connexity.
These legal mechanisms are examined in depth in our study on the legal mechanisms of factoring.
Situation of the assigned debtor's collective proceedings
Declaration and verification of claims
If the assigned debtor is the subject of insolvency proceedings, the factor must declare the claims it has acquired from the member. The factor must comply with the legal time limit for making the declaration, failing which the claim will be extinguished.
The status of creditor belongs exclusively to the subrogated factor or assignee. The member may no longer declare a claim that he has transferred.
However, if the claims have not been approved by the factor but have simply been the subject of a collection mandate, the obligation to declare falls to the member, who remains the creditor.
Enforceability of defences by the debtor
The debtor in insolvency proceedings retains the right to raise the defences inherent in the claim against the factor. In particular, he may invoke :
- Invalidity or termination of the contract
- The defence of non-performance
- Set-off for related debts
This question of the enforceability of exceptions is crucial in the international context.
Debt collection in compulsory liquidation
In the event of the debtor being wound up by the court, the factor is subject to the rule prohibiting individual lawsuits. He may not initiate or pursue any action for payment against the debtor.
The liquidator becomes the sole contact for debt collection. The factor must follow the procedure for checking and admitting receivables in order to hope for payment.
If the debtor has wrongly paid the member's liquidator the sums due to the subrogated factor, the subrogated factor cannot claim them. This is an action for payment subject to the suspension of proceedings and the obligation to declare.
To understand the different facets of factoring and its legal implications, our complete guide to factoring provides an overview of this complex mechanism.
Conclusion
The relationship between factoring and insolvency proceedings is one of constant tension between two imperatives: the protection of financing mechanisms and the preservation of creditors' rights in the proceedings. Securing factoring transactions requires a detailed understanding of the applicable legal rules and an ability to anticipate risks. Our firm can help you protect your rights in the event of insolvency proceedings affecting your factoring operations.
Sources
- Commercial Code, articles L. 622-7, L. 622-13, L. 622-24, L. 632-1, L. 632-2
- Monetary and Financial Code, articles L. 313-23 et seq.
- Court of Cassation, Commercial Division, 8 December 1987 (continuation of contracts)
- Cour de cassation, commercial chamber, 1 March 2005 and 19 April 2005 (current account)
- Cour de cassation, commercial chamber, 7 December 2004 (assignment of future receivables)
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