Factoring is a strategic financial lever for many businesses. For a full understanding of the concept, including its limitations and potential disputes, consult our guide to factoring.general factoring. This process is based on complex legal foundations that determine the rights and obligations of the parties. The security of the transaction depends largely on the debt transfer mechanism chosen. This article analyses the two main legal bases for factoring, their characteristics and their practical implications.
Personal subrogation as the main legal basis
Basis and mechanism of subrogation
Personal subrogation is historically the first and principal legal mechanism used in factoring. Based on articles 1346 et seq. of the French Civil Code (formerly 1249 et seq.), this technique allows the factor to replace the original creditor in his rights.
The mechanism is simple in principle: the factor pays the member (subrogating creditor), who transfers full ownership of his claim on the customer (assigned debtor) to the factor. This payment is generally made by immediate credit to the member's current account. The Court of Cassation has consistently ruled that this entry constitutes payment.
Conditions for the validity of subrogation
For subrogation to be valid, several conditions must be met:
- The claim must exist at the time of payment and subrogation. The factor cannot rely on an artificial or fictitious claim.
- The subrogator's intention must be expressed unequivocally. The stipulation must be express and leave no doubt as to the subrogator's intention, as the Court of Cassation pointed out in a ruling of 13 March 2001.
- The formalities must be carried out at the same time as the payment. The Civil Code prohibits deferred subrogation. It would be too late and the claim would be definitively extinguished by unconditional payment.
In practice, the term subrogation appears on the receipts given to the factor each time it pays an invoice to its member. The dematerialisation of these subrogation receipts is now commonplace and has been legally permitted since law no. 2000-230 of 13 March 2000.
Legal effects of subrogation
Subrogation produces powerful effects both between the parties and in relation to third parties.
Between the parties, the factor becomes the owner of the receivable on the date on which the payment to the member is recorded in the account. The factor acquires not only the principal of the receivable, but also all the shares and securities that may guarantee it (commercial paper, pledge, credit insurance policy, retention of title clause).
As far as third parties are concerned, subrogation effects the transfer of the claim without any further formality, making it enforceable against the member's creditors in particular. Following subrogation, a creditor of the member would no longer be able to seize the debt transferred to the factor, as confirmed by the Court of Cassation in a ruling dated 25 January 2005.
As we explain in our article on the enforceability of factoring exceptionsHowever, this technique has significant limitations in terms of the defences that can be raised by the debtor.
Assignment of trade receivables (Dailly Act)
Principle and legal framework of the Dailly assignment
The assignment of trade receivables, introduced by Act no. 81-1 of 2 January 1981 (known as the Dailly Act), is an alternative to subrogation. This mechanism, now codified in articles L. 313-23 et seq. of the French Monetary and Financial Code, enables the transfer of ownership of a series of trade receivables grouped together in a slip.
This legislative support is particularly recommended for international factoring, where the subrogation procedure may be less convincing for foreign factors. It is also the safest way of transferring future receivables without paying the amount immediately.
Formalities and validity of the transfer
The Dailly slip is subject to strict formal rules:
- Mandatory information listed in the Monetary and Financial Code
- Professional nature of claims and relations between the protagonists
- Date affixed by the assignee fixing the effective date
The major advantage of this procedure is that it officially allows the use of computerised procedures to individualise claims transferred en masse, as specified in article L. 313-23 of the French Monetary and Financial Code.
Legal effects of a Dailly assignment
Delivery of the docket to the factor vests the factor, without further formality, with all the claims referred to, together with the corresponding securities, guarantees and accessories, without any special stipulation. This transfer takes effect between the factor and the member and is enforceable against third parties.
To increase security, the factor may notify the assigned debtor of the assignment (article L. 313-28 of the French Monetary and Financial Code). This notification prohibits the debtor from paying to anyone other than the factoring assignee.
Additional protection would result from an acceptance given by the assigned debtor (article L. 313-29), which would then have strict consequences similar to the acceptance of a bill of exchange by the drawee: the debtor could no longer raise against the assignee the defences that he could raise against the assignor.
To find out more about the different contractual formulas, consult our detailed analysis of factoring framework agreements.
Practical issues involved in choosing a transfer mechanism
Comparative advantages of the two mechanisms
The choice between subrogation and cession Dailly depends on several factors:
- Operational simplicity : Subrogation is generally more flexible in its day-to-day implementation and better known to economic players.
- Future receivables Dailly assignment: Dailly assignment is more suitable for future receivables because it takes effect from the date of the slip, even without stipulating a price and without waiting for the certainty and maturity of the assigned receivable.
- International context In international factoring, the cession Dailly may be preferred, particularly when the foreign parties are unfamiliar with the French subrogation mechanism.
- Opposability to third parties : Both mechanisms offer good opposability to third parties, but with important procedural nuances in the case of collective proceedings.
Protection in the event of insolvency proceedings
The choice of transfer mechanism has significant implications in the event of insolvency proceedings being opened against the member.
As detailed in our article on disputes between the factor and third partiesDailly assignments can offer certain advantages in terms of legal certainty in crisis situations.
Transfers made on a regular basis prior to the opening of insolvency proceedings are generally considered to be valid. Case law considers that transactions that are simply the application of a framework agreement entered into before the suspect period should not be challenged.
Notification and information of the debtor
Whichever mechanism is chosen, notification of the debtor is of paramount importance.
In the context of subrogation, it is not a condition of enforceability against third parties, but its purpose is to prohibit the debtor from paying anyone other than the factor. After notification, a payment by the debtor to the member would no longer discharge the debt under article 1342-3 of the Civil Code.
In the case of a Dailly assignment, the notification is more formal and follows specific requirements (article R. 313-15 et seq. of the French Monetary and Financial Code).
Our firm regularly assists companies with the implementation of factoring solutions tailored to their needsby accurately assessing the advantages and disadvantages of each legal mechanism.
Conclusion
The choice between subrogation and cession Dailly is not a trivial one. It must be made taking into account the specific characteristics of the company, the nature of its receivables and the objectives pursued. The legal certainty of the factoring transaction depends largely on technical mastery of the transfer mechanisms and scrupulous compliance with the associated formalities. Our firm is at your disposal to help you secure your factoring operations and optimise their legal structure.
Sources
- Civil Code, articles 1346 to 1348-2 (formerly 1249 to 1252)
- Monetary and Financial Code, articles L. 313-23 to L. 313-35
- Act no. 81-1 of 2 January 1981 known as the Dailly Act
- Law no. 2000-230 of 13 March 2000 on electronic evidence
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