The mobilisation of receivables is an essential short-term financing technique for companies' cash flow. By transferring their invoices to a financial institution, they obtain immediate liquidity. However, when this operation involves foreign partners, a tangle of legal rules arises. Determining which national law applies then becomes a complex exercise, a source of uncertainty and risk. Receivables financing is a perfect illustration of the challenges of conflict of laws in international banking law.In this case, a misunderstood clause can undermine the entire arrangement.
Debt collection: techniques and issues in private international law
To finance their operating cycle, companies mainly use two mechanisms to mobilise their trade receivables: factoring (or factoring) and the assignment of business receivables, known as "cession Dailly". Although they pursue a similar objective, these two techniques have distinct legal bases that complicate their application in an international context. The main issue is which law governs the validity of the transfer of the receivable and, above all, its enforceability against third parties, i.e. the ability of the financial institution to enforce its rights not only against the company's customer (the assigned debtor), but also against the company's other creditors, particularly in the event of insolvency proceedings. This issue is all the more sensitive given that modern financing solutions, such as securitisation, rely on the legal certainty of such transfers. These mechanisms also differ from more traditional guarantee instruments, such as stand-alone guaranteeswhich create an independent payment undertaking rather than a transfer of an existing debt.
International factoring: distinction between subrogation and assignment of receivables
Factoring is a transaction whereby a company, the member, transfers its trade receivables to a specialised institution, the factor, which pays the amount to the member, in return for a commission, and then collects the receivables. Historically, French law has favoured the technique of contractual subrogation for this transfer. The factor pays the member and is "subrogated" to its rights against the debtor.
This qualification has long posed a difficulty in private international law. Under the 1980 Rome Convention, subrogation (article 13) and assignment of claims (article 12) were subject to separate conflict of laws regimes. This debate has now been brought to an end by the European Rome I Regulation (no. 593/2008), article 14 of which simply treats contractual subrogation as an assignment of claims. This harmonisation clarifies the situation for transactions within the European Union. In addition, the 1988 Ottawa Convention on International Factoring, ratified by France, provides a set of uniform substantive rules, but its scope is limited and does not resolve all conflict of laws issues, leaving the Rome I Regulation to play a central role.
International dailly assignment: facilitating business credit
Introduced by the Dailly Act of 1981, the assignment of trade receivables is a simplified mechanism for transferring receivables. It involves simply handing over a slip to a credit institution. This streamlined procedure was designed to give companies easier access to credit by enabling them to rapidly mobilise a portfolio of invoices, including from debtors located abroad. One of the major advantages of this system is that the assignment takes effect and becomes enforceable against third parties from the date shown on the slip, without any notification to the debtor being necessary at this stage. It is precisely this effectiveness that is put to the test in an international context, where French law may conflict with the law of the debtor's country or that of another creditor.
The law applicable to the relationship between assignor and assignee (factor/member)
The first relationship to be examined is that between the company (the assignor or member) and the financial institution (the assignee or factor). In accordance with Article 14(1) of the Rome I Regulation, this relationship is governed by the law applicable to the contract between them. The parties therefore have considerable freedom to choose the law governing their assignment or factoring agreement. This is the principle of the autonomy of the willThis is the cornerstone of international contract law.
In the absence of an express choice by the parties, the contract will be governed, according to article 4 of the same regulation, by the law of the country of habitual residence of the party providing the characteristic service. In a debt-securitisation transaction, the characteristic service is that of the financial institution providing the funds. In principle, therefore, the law of the country where the factor or the transferee bank has its head office will apply. This solution offers considerable predictability for credit institutions, which can thus subject all their standard contracts to one and the same law.
Enforceability of the assignment against the assigned debtors
Once the claim has been transferred to the financial institution, it is essential to determine the conditions under which the latter can claim payment from the company's customer (the assigned debtor). The Rome I Regulation provides a clear answer to this question. Article 14(2) states that "the law governing the assigned claim shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment may be relied on against the debtor and the dischargeability of the debtor's performance".
In practical terms, this means that the debtor's situation must not be affected by the assignment of the claim without his consent. He retains the same rights and the same exceptions (for example, failure to deliver the goods) that he could have raised against his original creditor. The law applicable to this relationship is that of the original commercial contract (sale, provision of services, etc.) that gave rise to the debt. For example, if a French company assigns to a French bank a claim against a German customer arising from a sales contract governed by German law, German law will determine whether the German customer must pay the French bank and under what conditions.
The thorny issue of enforceability against third parties
The most critical and uncertain point in the mobilisation of international receivables concerns its enforceability against the assignor's other creditors. If the company that has assigned its receivables is subject to seizure proceedings or compulsory liquidation, which of the assignee (the bank) or the other creditors (the Treasury, employees, other suppliers) will have priority over the sums paid by the assigned debtors? The answer depends on the law applicable to this question of "priority". The Rome I Regulation, like the Rome Convention before it, is silent on this point. This legal loophole is a major source of uncertainty for cross-border financing.
Faced with this vacuum, several theories have emerged in doctrine and case law. Traditionally, French law favoured the law of the assigned debtor's domicile, considering that the claim is located there. Other legal systems, such as English and German law, prefer to apply the law of the assigned claim, thereby unifying the fate of perfection against the debtor and third parties. A third approach, promoted by international instruments such as the UNCITRAL Convention on the Assignment of Receivables, suggests applying the law of the assignor's habitual residence. This last solution has the advantage of subjecting a company's entire receivables portfolio to a single law, that of its principal place of business, which greatly facilitates securitisation transactions and is in line with insolvency procedure law.
The draft European regulation on the enforceability of assignments of receivables
Aware of the legal uncertainty created by this diversity of approaches, in 2018 the European Commission presented a proposal for a regulation aimed at unifying the conflict rules in this area. The aim is to designate a single law to govern the effects of assignments of receivables vis-à-vis third parties. The draft establishes as a general principle the application of the law of the country of the assignor's habitual residence. This approach has been chosen for its predictability and consistency with the regulation on insolvency proceedings, as most priority conflicts arise in this context.
The proposal does, however, provide for exceptions. In particular, in securitisation transactions or for the assignment of bank account balances, the parties could choose to apply the law of the claim assigned. This mixed approach aims to strike a balance between the need for certainty in structured finance transactions and the simplicity of a single connecting rule. Although this text has not yet been adopted, it indicates a clear move by European law towards the law of the assignor as the main point of reference.
The 'police law' nature of article l. 313-27 of the Monetary and Financial Code
A question specific to French law arises: could the provisions of the Dailly Act be described as "lois de police"? A mandatory rule is a peremptory norm whose observance is deemed essential by a country to safeguard its public interests (political, social or economic organisation), to the point of requiring its application regardless of the law normally competent. Article L. 313-27 of the French Monetary and Financial Code, which states that a Dailly assignment is effective from the date shown on the slip "regardless of the law applicable to the claims and the law of the debtors' country of residence", could be interpreted as such a law.
If this interpretation were adopted by the courts, French law would apply to the enforceability of any Dailly assignment granted by a company in France, thereby sweeping aside conflict of laws rules and foreign laws that might impose other conditions (such as notification of the debtor). However, this interpretation is far from unanimous. The majority of doctrine doubts that the simplification of credit, although economically important, constitutes a sufficiently "crucial" public interest to justify the status of overriding statute. The question therefore remains open and constitutes a legal risk to be assessed for any international Dailly transaction involving a link with France, and illustrates how overriding legislation can influence the enforceability of assignments of receivables.
Structuring and securing factoring and Dailly assignment transactions in an international context requires a detailed analysis of the different applicable laws and the risks of conflict. For appropriate advice and the drafting of secure clauses, the assistance of a lawyer with expertise in this area is essential. Our firm is at your disposal to help you set up your financing solutions.
Sources
- Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I).
- Rome Convention of 19 June 1980 on the law applicable to contractual obligations.
- Ottawa Convention of 28 May 1988 on international factoring.
- French Monetary and Financial Code, articles L. 313-23 et seq (Assignment and pledging of business receivables).
- Proposal for a Regulation of the European Parliament and of the Council on the law applicable to the perfection of assignments of receivables (COM(2018) 96 final).
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