Factoring is a popular financial solution for companies faced with long payment terms. This complex legal mechanism combines short-term financing, a guarantee against non-payment and accounts receivable management. Its implementation requires a precise understanding of its legal and financial implications.
Understanding factoring and its legal framework
Factoring is the process whereby a company transfers its trade receivables to a specialised financial institution called a factor. The factor takes charge of collection and guarantees payment, even if the debtor defaults. The factor may also provide advance financing.
This process is based on a transfer of ownership of the receivables, achieved by personal subrogation or cession Dailly. The legal validity of this transfer determines the effectiveness of the system. The the legal mechanisms of factoring vary according to the objectives sought and the nature of the receivables concerned.
The French legal framework has not created a specific regime for factoring. Operators use the tools of ordinary law, in particular the Civil Code for subrogation and the Monetary and Financial Code for cession Dailly. Only international factoring benefits from a dedicated convention (the 1988 Ottawa Convention).
The legal basis for the transfer of receivables
There are two legal techniques for transferring receivables to the factor:
Personal subrogation is the traditional form. The factor pays the member and acquires the debt in return. This mechanism requires a subrogation discharge to be issued at the same time as the payment. The factor receives exactly the same rights as the original creditor, no more and no less.
The assignment of trade receivables (Dailly Act) offers a more formalised alternative. The bordereau Dailly enables the global transfer of existing or future receivables. This technique has specific advantages in certain situations, as described in our analysis of issues relating to insolvency proceedings.
The choice between these two techniques depends on a number of factors: the nature of the claims, the international context and the risk of defences being raised. Our team oflawyers specialising in factoring guides you through this strategic choice.
The factoring agreement: points to bear in mind
The relationship between the company and the factor is based on a framework agreement that defines their rights and obligations. In particular, this contract sets out:
The member undertakes to assign its receivables (globality clause), to guarantee their existence, to notify the debtors and to remunerate the factor. The factor undertakes to pay the approved receivables, guarantee them and provide management services.
There are several formulas: traditional factoring, due date factoring, unsecured factoring and confidential factoring. Each offers a different balance between the services provided and the remuneration received.
The financial aspects include the commission (0.5 to 2.5% of the invoices), the interest on early financing and the guarantees required (in particular the holdback). A detailed analysis of contractual obligations and guarantees is essential before any signature.
Managing day-to-day legal risks
The main legal risk is the possibility of raising defences. The debtor can raise the same defences against the factor as he could have raised against the original creditor: non-performance of the contract, lack of conformity, set-off. This situation weakens collection and can lead to complex litigation.
Another frequent risk is the conflict of rights with other creditors. The factor may come into competition with distraining creditors, other assignees, or beneficiaries of specific rights such as subcontractors. Case law has developed balanced solutions for these conflicts between the factor and third parties.
Insolvency proceedings complicate the situation considerably. The opening of proceedings against the member or the debtor alters the contractual balance and the validity of debt transfers. A specific analysis of the enforceability of defences is essential in these particular contexts.
International perspectives
International factoring meets the specific needs of exporters. It is generally based on collaboration between two factoring companies (export and import) and benefits from a dedicated contractual framework.
The 1988 Ottawa Convention harmonises certain aspects of the international factoring contract. In particular, it defines the exceptions that may be invoked by the debtor and clarifies the obligations of the parties.
International factoring differs from its domestic counterpart in a number of important ways: a two-factor structure, higher costs and greater legal complexity. The challenges of international factoring deserve special attention for exporting companies.
The difficulties specific to these cross-border transactions include conflicts of law, determining the competent jurisdiction and the recognition of judicial decisions.
Conclusion
Factoring offers companies a comprehensive solution combining financing, guarantees and receivables management. However, its implementation requires a technical mastery of the underlying legal mechanisms and particular vigilance in the face of litigation risks. To ensure the security of your factoring operations and maximise their benefits, don't hesitate to consult our team of specialist lawyers.
Frequently asked questions
What is the difference between factoring and discounting?
Factoring guarantees payment of receivables to 100% without recourse against the member in the event of non-payment, whereas discounting provides financing but retains recourse against the remitter in the event of default by the debtor.
What are the two main legal mechanisms used in factoring?
Personal subrogation (articles 1346 et seq. of the French Civil Code) and assignment of trade receivables (Dailly Act, articles L. 313-23 of the French Monetary and Financial Code) are the two main legal instruments used.
What are the main obligations of a member company under a factoring contract?
The member must assign all its receivables (globality clause), guarantee their actual existence, notify the debtors of the transfer and pay the factor's remuneration.
How is the factor's remuneration calculated?
Remuneration generally includes a commission (0.5% to 2.5% of invoices) for services and the guarantee, plus interest in the event of early payment of receivables.
What is a holdback in factoring?
The holdback is a percentage (10-20%) of the assigned receivables frozen in a separate account, forming a cash pledge that protects the factor against any recourse.
What does the enforceability of exceptions mean in factoring?
The raising of defences allows the debtor to raise against the factor certain defences that it could have raised against the original supplier, such as non-performance of the contract or set-off.
Is factoring possible for international receivables?
Yes, international factoring is governed by the 1988 Ottawa Convention and generally involves two factoring companies (export and import) working together in an "interfactors" chain.
What happens if the member goes into receivership?
Claims duly transferred before the commencement of the proceedings are not subject to the collective creditors' rights, but the factor must declare its own claims within the statutory time limits.
How is a dispute between a factor and a subcontractor resolved?
According to the case law, the conflict is resolved in favour of the subcontractor, because the law of 31 December 1975 limits the assignment of the contractor's claims to the work that he personally carries out.
Can a customer refuse to pay the factor if the goods delivered are defective?
Yes, the customer can raise the defence of non-performance of the commercial contract against the factor, because the factor acquires the debt with its qualities but also its legal defects.
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