Who is the Adherent?
The Adherent, or the Supplier, is a company that, given its business model (which is providing its clients with deferred payment terms), becomes entitled to certain receivables. In order to obtain immediate liquidity, but also to improve speed of collection, the Adherent gives the receivables to the Factor.
Who is the Factor?
The Factor is a bank, or a non-banking financial institution, specialized in factoring services. As such, the Factor can pay to the Adherent the value of the eligible assigned receivables, before or upon due date, subrogated to the rights of the Adherent, and, therefore, collecting such receivables as rightful owner, from the Assigned Debtor. Such payments will be made under a pre-defined Assigned Debtor limit and at a cost.
Who is the Assigned Debtor?
The Assigned Debtor is the Buyer / Beneficiary / Importer of the Adherent’s goods and/or services. The sale of Adherent's goods and/or services generates the receivables assigned to the Factor.
What does “recourse” refer to?
When the Factor does not provide the Adherent with a non-payment risk coverage service, or when a commercial dispute that affects invoices for which the Factor advance funds is solved in Debtor’s favor, the Factor has a recourse right againts the Adherent for such amounts. In practice, this means the Factor can ask the Adherent to reimburse any amounts advanced againts receivables affected by commercial disputes or the payment of which is delayed by the Debtor over the grace period granted by the Factor to the Adherent.
How is the Factoring Limit calculated?
The essence of the Factoring Limit and what differentiates it from other short term financing limits is its capacity to cover, at any given time, the value of goods/services invoiced and not collected from a certain Assigned Debtor.
The value of the limit is set for each Assigned Debtor, based on:
- the estimated sales volume to that partner (including VAT where the case)
- real payment term
- business seasonality (peak sales periods)
- works and invoicing schedule for specific contracts
Factoring Limit = Estimated Turnover x Real Payment Term /360
Example:
Estimated Yearly Turnover = RON 2,400,000
Contractual Payment Term = 30 days
Real Payment Term = 45 days
Seasonality: June-September (120 days) account for 70% of total yearly turnover
Factoring Limit = LEI 2.400.000 x 70% x 45 / 120 = LEI 630.000
Why does the Factor apply VAT to its price?
Although factoring products have a financing component, they do not represent a traditional financing, but are closer to services rendering. Consequently, according to the Fiscal Code (Law 571/2003), corroborated with the provisions of HG 44/2004 with regard to the Fiscal Code and the relevant application rules, Art. 141 paragraph 2, point 35, the VAT tax base for factoring services is the value of the service, i.e. the commission applied by the assignee, including the component afferent to the financing service.
The VAT consequently applied does not represent an extra cost. The Factor issues, at the end of each month of contract, an invoice reflecting the VAT relevant for the services rendered during that specific month. This VAT amount is deductible, according to the legislation in place.
What if the Debtor included a non-assignment clause in our contract?
The assignment under a domestic (both Supplier and Debtor are legal persons residing in Romania) factoring transaction cannot be banned, according to the Civil Code (art. 1.570, 1.573 and 1.578), any contractual clause stipulating such a provision being null and void:
Art. 1.570 Civil Code – Inalienability Clause
(1) The assignment that is banned or limited by means of an agreement between the assignor and debtor does not have any impact on the debtor unless:
a) the debtor agreed to the assignment;
b) the ban is not expressely mentioned in the document attesting the receivable and the assignee was not aware and was not meant to be aware of the existence of a ban at the time of the assignment;
c) the assignment regards a receivable that regards a sum of money.
The above provisions are not applicable to Public Institutions Debtors as the assignment of receivables against them is regulated by a special law, Law 121/2011. Art. 61 stipulates that, for the assignment to be oposable to the Debtor, its prior, written consent is required.
Is my client’s consent required for an assignment?
The assignment is oposable to the Debtor:
- when a written Notification of Assignment, on paper or in electronic format was received by the Debtor; such a Notification should include details such as the identitiy of the assignee, should reasonably identify the assigned receivables and indicate to the debtor that they should pay in favor of the assignee &
- the assignment is published (in AEGRM – the Electronic Archive of Real Movable Collaterals)
- independent from any refusal of the Debtor or contractual clauses banning it.
The above provisions are not applicable to Public Institutions Debtors as the assignment of receivables against them is regulated by a special law, Law 121/2011. Art. 61 stipulates that, for the assignment to be oposable to the Debtor, its prior, written consent is required.
Why are CECs not accepted as payment instruments for factored receivables?
- CECs are at sight payment instruments and cannot have a due date in the future (like promissory notes can); thus, CECs can’t be used for deferred payments, specific to factoring transactions. In 2008, OUG 38/2008 changed Law 59/1934 with regard to CECs and banned their post-dating (previously allowed), with the clear intention of clearly establishing CECs’ role of payment and not credit instrument.
- The above change was reflected into practice by the ban on presenting for payment a CEC bearing a due date that follows its issuing date, the CEC’s due date being the same as its issuing.
- When an invoice payable by CEC is assigned to the Factor, the CEC needs to be indorsed in the Fctor’s favor, the endorsement date being the assignment date and not the future date born by the CEC; as such, the post-dating of the instrument becomes obvious and the real issuing date of the instrument uncertain. The endorsement date will also be considered the issuing (and due) date. The consequence of not submitting a CEC to the bank wihtin a 15 day from its issuing period, is the loss of recourse right against the endorsing and guaranteeing party, but also of the possibility to obtain payment by means of foreclosure, should the issuing party refuse to pay on its own intent.
- Please note that, althoug the right to request payment survives the CEC’s payment date, the issuing party is entitled to revoke the CEC payment order and, should their accounts not provide for the funds necessary to cover the payment, the owner of the CEC (the Factor) will lose the right to go against them.
- Another issue to be carefully considered is that of the mandate given to a certain person with regard to CECs signing; the mandate valid at the deffered payment’s date may differ from the one valid at the real issuing date and, in this case, the bank will not process the payment despite funds being available.
What should I do if receive a 3rd party garnishment notice?
According to OG 92/2003 on the Fiscal Procedure Code, when a company (the Supplier) does not fulfill its obligations to the local and central state budget, the fiscal authorities are authorized to start forced execution procedures, including applying a garnishment on 3rd parties (debtors) againts which the Seller has uncollected receivables.
In such a case, if the respective Debtor had previously received a Notification of Assignment, stating that its debts to the Supplier became the object of a factoring contract, the Debtor has the obligation to inform the fiscal authorities that they no longer have debts to the Supplier, but to the Factor who granted a factoring facility to the latter. As such, the payment obligation of the Debtor to the Factor cannot be impacted by any later garnishment notification, regardles the enforcing party.
